Extreme Temperatures and Firm-Level Stock Returns

Area of Science:

• Environmental Economics
• Behavioral Finance
• Financial Markets

Background:

• Investor sentiment and mood significantly influence stock market dynamics.
• Environmental factors, such as weather, can impact economic activities and investor psychology.
• Understanding the link between climate and financial markets is crucial for risk assessment.

Purpose of the Study:

• To investigate the relationship between extreme temperatures and firm-level stock returns in China.
• To identify firm-specific characteristics that moderate the impact of extreme weather on stock performance.
• To explore the role of investor mood as a potential mechanism driving these effects.

Main Methods:

• Utilized a multivariate ordinary least squares regression model with fixed effects.
• Analyzed firm-level stock return data and daily weather conditions in China from 2007 to 2019.
• Examined heterogeneity in the temperature-return relationship across different firm types.

Main Results:

• Firm-level stock returns were found to decrease with exposure to extreme temperatures.
• The negative impact of extreme temperatures on abnormal stock returns was more pronounced in smaller, younger, more volatile, less profitable firms, and those with more intangible assets.
• Evidence suggests that investor mood plays a significant role in the observed temperature-return effect.

Conclusions:

• Extreme weather conditions have a discernible negative effect on stock market performance at the firm level.
• Firm characteristics mediate the sensitivity of stock returns to temperature fluctuations, highlighting vulnerabilities in certain market segments.
• The findings provide empirical support for the environment-induced mood effect in financial markets.