Does Corporate Exposure to Weather Affect Bond Yield Spread?

46 Pages Posted: 9 Mar 2020 Last revised: 11 Mar 2020

See all articles by Lei Zhang

Lei Zhang

City University of Hong Kong

Min Zhu

University of Queensland

Date Written: February 28, 2020

Abstract

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

Zhang, Lei and Zhu, Min, Does Corporate Exposure to Weather Affect Bond Yield Spread? (February 28, 2020). Available at SSRN: https://ssrn.com/abstract=3547895 or http://dx.doi.org/10.2139/ssrn.3547895

Lei Zhang (Contact Author)

City University of Hong Kong

College of Business
83 Tat Chee Avenue
Hong Kong
China

Min Zhu

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/min-zhu

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