Climate Regulatory Risks and Corporate Bonds

57 Pages Posted: 17 Apr 2020

See all articles by Lee Seltzer

Lee Seltzer

University of Texas at Austin - Department of Finance

Laura T. Starks

University of Texas at Austin - Department of Finance

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: March 28, 2020

Abstract

Examining how climate and other environmental regulatory risks affect bond risk and pricing, we find that bond credit ratings and yield spreads appear to be influenced by a firm's environmental performance along with its regulatory conditions. Firms with poor environmental profiles tend to have lower credit ratings and higher yield spreads, particularly when the firm is located in a state with more stringent environmental regulations. Using the Paris Agreement as a shock to expected climate regulation, we provide evidence of a causal relation between climate regulatory risks and the credit ratings and yield spreads of bonds with problematic environmental profiles.

Keywords: Climate Risk, Regulatory Risk, Fixed Income

JEL Classification: G38, G24, G00

Suggested Citation

Seltzer, Lee and Starks, Laura T. and Zhu, Qifei, Climate Regulatory Risks and Corporate Bonds (March 28, 2020). Available at SSRN: https://ssrn.com/abstract=3563271 or http://dx.doi.org/10.2139/ssrn.3563271

Lee Seltzer

University of Texas at Austin - Department of Finance ( email )

TX
United States

Laura T. Starks (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

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