The Impact of Climate Change on the Cost of Bank Loans

80 Pages Posted: 4 Dec 2020 Last revised: 18 Jun 2021

See all articles by Siamak Javadi

Siamak Javadi

University of Texas - Rio Grande Valley

Abdullah Al Masum

University of Wisconsin - Oshkosh

Date Written: February 3, 2020

Abstract

We find robust empirical evidence that firms in locations with higher exposure to climate change pay significantly higher spreads on their bank loans. To alleviate the concerns related to using firms’ headquarters in determining climate risk exposure, we exploit the economic link between a firm and its customers and find that the exposure of a firm’s customers to climate risk also adversely affects that firm’s cost of borrowing. In the cross-section, we find that the long-term loans of poorly rated firms drive the effect. Overall, our evidence suggests that lenders increasingly view climate change as a relevant risk factor.

Keywords: Climate change, cost of bank loans, loan spread

JEL Classification: G21, G32, Q54

Suggested Citation

Javadi, Siamak and Masum, Abdullah Al, The Impact of Climate Change on the Cost of Bank Loans (February 3, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3717013 or http://dx.doi.org/10.2139/ssrn.3717013

Siamak Javadi

University of Texas - Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Abdullah Al Masum (Contact Author)

University of Wisconsin - Oshkosh

College of Business
800 Algoma Blvd
Oshkosh, WI 54901
United States

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