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Climate Change, Demand Uncertainty, and Firms' Investments: Evidence from Planned Power Plants

Author

Listed:
  • Lin, Chen

    (U of Hong Kong)

  • Schmid, Thomas

    (U of Hong Kong)

  • Weisbach, Michael S.

    (Ohio State U and ECGI)

Abstract

How does demand uncertainty affect firms' investment decisions? We consider this issue from the perspective of electricity-producing firms and their planned investments in new power plants. Using plausibly exogenous variations in temperature predictions across scientific climate models to measure uncertainty about future electricity demand, we find that uncertainty increases investments in plants with flexible production technologies but depresses non-flexible investments. The net effect of uncertainty on investments is positive if firms have access to flexible investment opportunities. These results are consistent with models in which the impact of uncertainty on investments depends on the investments' production flexibility.

Suggested Citation

  • Lin, Chen & Schmid, Thomas & Weisbach, Michael S., 2023. "Climate Change, Demand Uncertainty, and Firms' Investments: Evidence from Planned Power Plants," Working Paper Series 2023-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2023-23
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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