This paper studies how high temperatures can influence firm demography. Using administrative data for the universe of Italian firms, we analyse the entry, exit and reallocation rates separately, at the sectoral and geographic levels. The use of balance sheet data also allows us to examine the channels through which temperatures affect business operations.
Extremely high temperatures reduce the growth rate of the number of businesses in the market, due to a decrease in the entry rate and an increase in the exit rate. This finding applies to the areas of the Italian peninsula that are hotter, on average, and, at the sectoral level, especially to agriculture, manufacturing, construction and retail sales. The analysis of firms' balance sheets shows that young and large firms are able to adapt to warmer days, thereby improving profitability; at the other extreme, older and smaller firms see their profits shrink as a result of sudden increases in temperatures.
