Does Corporate Exposure to Weather Affect Bond Yield Spread?
46 Pages Posted: 9 Mar 2020 Last revised: 11 Mar 2020
Date Written: February 28, 2020
This paper studies the effect of corporate weather exposure on the cost of borrowing. We construct three firm-level measures of weather exposure – two obtained by regressing firm equity returns on abnormal cumulative precipitations in the firm’s headquarter state, and one by linguistically analyzing the firm’s annual reports. We show that exposure to weather risk substantially increases corporate bond yield spreads in both primary and secondary markets. The linkage from weather exposure to the cost of borrowing is explored. Tests reveal that weather risk has significant operational implications for firms, such as increased volatility of both cash flows and equity returns.
Keywords: Weather, Abnormal Cumulative Precipitation, Yield Spread, Cash Flow Volatility, Equity Volatility, Climate Finance
JEL Classification: G12, G14, Q54
Suggested Citation: Suggested Citation