Climate Regulatory Risk and Corporate Bonds

Lee Seltzer, Laura Starks and Qifei Zhu

No 29994, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Concerns about climate risk suggest it should affect risk assessment and pricing of corporate securities, particularly for firms facing potential regulatory restrictions. Employing a shock to expected climate regulations, we find support for this hypothesis given our evidence that climate regulatory risks causally affect bond credit ratings and yield spreads. Moreover, a structural credit model indicates the increased spreads for high carbon issuers, especially those located in stricter regulatory environments, derive from changes in firms' asset volatilities rather than asset values, highlighting that regulatory uncertainty affects security pricing. The results have important implications for corporate decisions, portfolio management, and policymaking.

JEL-codes: G12 G14 G23 G28 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
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Working Paper: Climate Regulatory Risks and Corporate Bonds (2022)
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