Working Paper: NBER ID: w29994
Authors: Lee H. Seltzer; Laura Starks; Qifei Zhu
Abstract: Investor concerns about climate and other environmental regulatory risks suggest that these risks should affect corporate bond risk assessment and pricing. We test this hypothesis and find that firms with poor environmental profiles or high carbon footprints tend to have lower credit ratings and higher yield spreads, particularly when their facilities are located in states with stricter regulatory enforcement. Using the Paris Agreement as a shock to expected climate risk regulations, we provide evidence that climate regulatory risks causally affect bond credit ratings and yield spreads. Accordingly, the composition of institutional ownership also changes after the Agreement.
Keywords: climate risk; corporate bonds; regulatory risk; credit ratings; yield spreads
JEL Codes: G12; G14; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms' environmental profiles (Q52) | Credit ratings (G24) |
| Firms' environmental profiles (Q52) | Yield spreads (E43) |
| Regulatory risks (G18) | Credit ratings (G24) |
| Regulatory risks (G18) | Yield spreads (E43) |
| Stricter regulatory enforcement (G18) | Credit ratings (G24) |
| Stricter regulatory enforcement (G18) | Yield spreads (E43) |