The Impact of Air Pollution on Cost of Debt: Evidence from Corporate Bond Markets

Abstract

This study explores the influence of air pollution on the corporate bond market in China. An air pollution premium is documented, whereby bonds issued in more polluted areas are associated with higher offering yields at issue in the primary market and higher yield spreads in the secondary market. The statistically and economically significant air pollution premium is robust to a battery of sensitivity checks. The air pollution premium is associated with rising investor attention to climate risk in financial markets.

Keywords: climate change, corporate bond market, air pollution, bond yield spread, cost of debt

JEL Classification: G13, M41, G3