Does Extreme Weather Impact Performance in Capital Markets? Evidence from China

Abstract

No form of economic activity is unaffected by climate change, which has emerged as a new risk factor impacting financial market stability and sustainable development. This study examines the impact of extreme weather on the stock returns of A-share listed companies in China. Utilizing a decade-long dataset, we construct monthly proportions of extreme high-temperature days and extreme humid days using a percentile comparison approach. The findings reveal a significant negative impact of extreme weather on stock returns. Specifically, each standard deviation increase in the monthly proportion of extreme high-temperature days and extreme humid days corresponds to a decrease in annualized returns by 0.09% and 0.15%, respectively. The mediation analysis suggests that extreme weather primarily affects stock returns through its influence on investor sentiment, impacting economic decision making, with minimal direct effects on corporate performance. Additionally, the sensitivity of stock returns to extreme weather varies notably among different types of companies. Larger, more profitable, and less risky firms show lower sensitivity to extreme weather. The impact is observed not only in heat-sensitive industries but also in non-heat-sensitive industries and remains significant even after excluding company announcement days. This study offers new insights and relevant recommendations for businesses and policymakers on sustainable development and financial stability.