Corporate Exposure to Weather and Bond Yield Spread
60 Pages Posted: 9 Mar 2020 Last revised: 22 Oct 2021
Date Written: October 3, 2021
We study the effect of corporate exposure to weather on costs of borrowing. We construct firm-level weather exposure measures and find that firms exposed to greater weather risk experience substantially higher yield spread on their bonds in the secondary and primary markets. Chanel tests reveal that the link between corporate weather exposure and yield spread arises via firm fundamentals rather than from frictions in the bond market. We find that weather variations significantly increase operating cash flow risk and equity volatility of the exposed firms, while bond illiquidity can hardly explain the effect of weather exposure.
Keywords: corporate weather exposure, abnormal cumulative precipitation, bond yield spread, cash flow risk, equity volatility, climate finance
JEL Classification: G12, G14, Q54
Suggested Citation: Suggested Citation