The impact of climate risk on earnings management: International evidence

This study explores the influence of climate risk on properties of firms’ financial reporting practices with observations collected from 64 countries between 2005 and 2016. We use a country-level climate risk indicator developed by Germanwatch to measure the degree of damage from extreme weather events, and find that climate risk positively influences firms’ engagements in both accruals-based and real earnings management. Furthermore, we document that the above-mentioned effects of climate risk are moderated by the quality of country-level public governance. Subsample analysis suggests that the main effect of climate risk on earnings management is more pronounced for firms from developed countries, for firms in environment-sensitive industries, and for firms reporting losses. Our findings, which are supported by a battery of robustness tests, have important implication for regulators and policymakers.