Navigating Carbon Data in Financial Research: Implications for Corporate Bond Yield Spreads and Liquidity

Alexander Schöffel

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: This dissertation examines the relationship between firms’ carbon emission intensity and financial characteristics of corporate bonds in secondary markets. In particular, the dissertation analyses the effect of carbon intensity on yield spread risk premia relative to risk-free bonds, as well as on various measures of bond liquidity. While theory suggests a positive link between carbon emissions and firm-level risk, implying higher capital costs and reduced trading activity, the empirical evidence in the existing literature remains inconclusive. A comprehensive review of the literature and recent academic debate identifies methodological inconsistency as a key driver of these contradictory findings. The first chapter synthesizes ongoing discourse around the use of carbon data in financial research and identifies six critical methodological choices that have the potential to substantially influence research outcomes. Weighing the trade-offs associated with these alternatives, the chapter proposes a set of decision-making recommendations designed to enhance methodological consistency in future empirical work. Applying these methodological recommendations, the second chapter finds, contrary to the “carbon risk hypothesis”, that bonds issued by high-emission firms exhibit lower yield spreads compared to those from lower-emission peers. This “carbon discount” is especially pronounced among A-rated bonds and strengthens over time, while the effect diminishes and becomes statistically insignificant for BBB-rated bonds. The third chapter analyzes the relationship between firm-level carbon intensity and bond-level liquidity metrics. No persistent illiquidity premium is observed for high-emission issuers, even in bond markets increasingly shaped by sustainably investing fixed income funds. Overall, the dissertation contributes to resolving empirical inconsistencies rooted in methodological divergence and demonstrates that, when aligned with best-practice methodological standards from the literature, there is no robust evidence of negative effects of high carbon intensity on corporate bond spreads or liquidity.

Date: 2026-01-29
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