The Perception of Climate Change Risk and Early-tenure CEOs1)

Recent literature suggests that the tendency for earnings overstatement is more pronounced in the early years of CEOs’ tenure compared to later years, driven by their career concerns (Ali and Zhang 2015). A recent study suggests that the firm’s perception of climate change risk significantly influences economic activities and the future growth of firms (Pankratz et al. 2023). Building on this literature, I investigate the impact of early-tenure CEOs on a firm’s perception of climate change risk. My empirical analyses reveal a negative association between early-tenure CEOs and firms’ perception of climate change risk. Additionally, I find that a heightened perception of climate change risk is associated with greater usage of uncertain language in firms’ annual reports. Furthermore, I find that when early-tenure CEOs perceive a higher climate change risk, they are less likely to choose to cut R&D expenditure. The results remain robust when employing propensity score matching, entropy balancing, incorporating firm and regional fixed effects, and exploring alternative model specifications. The results hold particular robustness for firms led by overconfident CEOs, those with significant equity incentives, non-local CEOs, and high-ability CEOs. This study contributes to the accounting literature by shedding light on the impact of CEO tenure on the perception of firm-level climate change risk.