Risk management and private debt contracts: The role of weather derivatives

Viet Do, Thu Ha Nguyen and Tram Vu

Journal of Business Finance & Accounting, 2024, vol. 51, issue 9-10, 2848-2883

Abstract: Using energy firm data and the 1997 introduction of weather derivatives as a natural experiment, we document an average 21‐basis‐point interest reduction in bank loans after borrowers hedge with weather derivatives. This saving increases among borrowers with higher risk or less complex financial reports, and during more uncertain market conditions or when investors pay more attention to climate risks. Our results are robust to endogeneity‐corrected methods. Hedging firms are more willing to pledge collateral, accept stricter covenants and exhibit lower risks and a lower likelihood of covenant violations within 1 year following loan origination. We also find hedging firms have lower bond yields and a lower bank debt ratio, indicating that the benefits from hedging with weather derivatives extend to the public debt market. Overall, our findings demonstrate important financial implications of hedging using weather derivatives.

Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/jbfa.12800

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:51:y:2024:i:9-10:p:2848-2883

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0306-686X

Access Statistics for this article

Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

More articles in Journal of Business Finance & Accounting from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().