Does Temperature Influence Dividend Policy?

Leveraging local temperature as a proxy for physical climate risk, this paper empirically investigates whether higher temperature influences the dividend policy of local US firms. Our results indicate that higher temperature reduces the dividend payment of local firms, and the dividend reduction effect is more pronounced for firms with financial constraints. Further analysis suggests that firms reduce more dividend payments if they are more vulnerable to extreme climate. We validate our results using a textual‐based measure from conference calls and find that the dividend reduction effect is stronger among firms with higher physical climate risk exposure. Our research indicates that extreme heat has a real impact on firms' financing policy.