Accounting & Finance Research Community – Professor Chendi Zhang

Title: Temperature Sensitivity, Mispricing, and Predictable Returns

Date:  24 January 2024

Time: 14:00-15:00

Location: NUBS.2.08

If you would like to attend, please register using the following link:

Temperature Sensitivity, Mispricing, and Predictable Returns

Speaker: Professor Chendi Zhang, University of Exeter Business School

Chendi Zhang is Professor of Finance and the Director of Exeter Sustainable Finance Centre. He is the Associate Dean for Research & Impact of the University of Exeter Business School. He specialises in sustainable and responsible finance, corporate finance, behavioural finance, and emerging markets.

Abstract

We examine the relation between temperature change and firm performance. Using a novel measure of firm-level temperature sensitivity, we show that stocks with a higher temperature sensitivity are overpriced. They have lower future profitability, riskier corporate policies, and lower future returns. Nonlocal institutional investors allocate higher portfolio weights to firms with high temperature sensitivities, relative to local institutional investors, and sell-side equity analysts issue forecasts that are less accurate for these firms, potentially contributing to the mispricing. Collectively, our results suggest that financial markets under-react to firm-specific information about climate change, which generates predictable patterns in returns. During the 1968-2020 sample period, a trading strategy that exploits this information generates an annualized risk-adjusted return of over 4%.