Climate Change Social Norms and Conditional Conservatism

Using data from Yale Climate Opinion Maps over the period 2014-2020, we find that managers of U.S. firms headquartered in counties with higher climate change social norms (CCSN) engage in more conditional conservatism. This result is consistent with the notion that CCSN influences managers’ behavioral intentions towards climate change and thereby shapes their financial reporting choices. Cross-sectional analyses demonstrate that the positive relation between CCSN and conditional conservatism is more pronounced for climate-non-vulnerable industries and during times with greater media coverage of climate change. Given the substitution between accrual-based earnings management (AEM) and real earnings management (REM) as well as managers’ preference to REM, we perform path analysis and find that CCSN directly influences firms’ REM activities and indirectly via conditional conservatism in response to market pressure arising from climate change. Overall, our findings have implications for various financial report users, including standard setters and regulators who are contemplating new climate-related disclosures