Climate change risk and labor investment efficiency

Purpose We examine how climate change risk, the uncertainty component of a firm's climate change exposure, affects labor investment efficiency. Because labor is costly to adjust and labor investment is especially sensitive to uncertainty, we ask whether this risk dimension, rather than general exposure or sentiment, distorts firms' hiring and firing decisions. Design/methodology/approach We use US firm-level data from 2002 to 2022, measuring climate change exposure with the text-based measures of Sautner et al. (2023) and proxying for labor investment inefficiency using abnormal net hiring (Pinnuck and Lillis, 2007). We estimate regressions for all five climate measures and use correlation and principal component analysis to show that climate change risk captures variation distinct from the other four. We also examine whether the staggered adoption of state climate adaptation plans mitigates this effect, using a difference-in-differences design (Callaway and Sant'Anna, 2021). Findings Climate change risk reduces labor investment efficiency by increasing both over-hiring and under-hiring. This effect is specific to the risk dimension of climate change exposure; general exposure and sentiment measures show no significant association. The effect is stronger for financially constrained firms, firms with lower accounting quality, firms with low unionization, and firms in climate-vulnerable industries. We find no evidence that state climate adaptation plans mitigate this effect. Originality/value Prior climate finance research focuses mainly on capital-market and financing outcomes. We show that climate change risk also shapes firms' human capital allocation decisions, identifying it as a new determinant of labor investment efficiency.