Thermal stress and financial distress: Extreme temperatures and firms’ loan defaults in Mexico
38 Pages Posted: 5 Oct 2021 Last revised: 13 Oct 2022
Date Written: April 7, 2022
The frequency and intensity of extreme weather events are likely to increase with climate change. Although a growing body of literature shows that extreme weather harms economic outcomes, there is a lack of evidence about how it affects firms' credit performance and credit use. This question is relevant for low and middle-income economies, where institutions are less prepared to deal with informational asymmetries and credit markets are shallow. We fill this gap by exploiting an extraordinarily detailed data set with loan-level information for the universe of loans extended by commercial banks to private firms in Mexico. We find that anomalous days of extreme heat increase credit delinquency rates. The effect is concentrated in the agricultural sector, but there is also an impact on non-agricultural industries that rely heavily on local demand. Our results are consistent with general equilibrium effects originated in agriculture that expand to other sectors in agricultural regions.
Keywords: Extreme temperatures, Default, Firm credit, Agriculture.
JEL Classification: D25, Q54,Q14
Suggested Citation: Suggested Citation