Asset Stranding, Climate Credit Risk and Capital Structure Design Under Global Warming

Abstract

We examine the impact of climate change on the pricing of corporate securities and on the capital structure of firms. The main transmission channel through which global warming has an impact is the stranding of assets upon liquidation. The predictions of our model are consistent with recent empirical evidence. Global warming has a profound impact on debt capacity and the optimal capital structure. We are the first to document a possible disciplinary effect. The higher the exposure, the lower the leverage, which interestingly does not necessarily lead to lower credit spreads. We disentangle the direct and indirect effects of global warming on credit risk management metrics and show how these effects complement each other and which effects dominate and when.