Firm-level climate risk and accounting conservatism: International evidence

Abstract

We examine the impact of climate-risk exposure on accounting conservatism, and document a significant positive association. Utilizing a firm-level climate-exposure measure (CRI) for a large international sample covering 46 countries from 2002 to 2021, we find that firms facing climate risk tend to adopt more conservative reporting practices. This effect is notably stronger during pivotal periods of climate awareness, such as that around the Paris Climate Agreement, and in jurisdictions governed by common law. Our results remain valid under a series of robustness tests and after addressing endogeneity concerns. Further analyses indicate that this positive association is more pronounced in well-governed firms and in firms with high levels of environmental and social performance, but less pronounced in firms with high degrees of complexity and information asymmetry. Additional tests reveal that firms in environmentally sensitive industries and those operating in developed countries adopt more conservative reporting than counterparts in non-environmentally sensitive industries or in developing countries. Our final analysis suggests that regulatory risks have a greater effect on accounting conservatism than physical risks. Our paper contributes to the ongoing discourse on climate change, documenting the ‘bright side’ of firms' exposure to climate risk.

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