Spillover of the carbon risk along the supply chain: Evidence from the U.S. corporate bond market

Utilizing the Paris Agreement as an exogenous shock to assess carbon risk among high-emission suppliers, this study investigates the negative spillover effects of the carbon risk along the supply chain, from suppliers to customers, through a Difference-in-Differences approach. Specifically, we examine the causal impact of the suppliers’ carbon risk on the cost of corporate bonds for their downstream customers, using data from bond issuances by publicly traded U.S. firms from January 1, 2002, to June 30, 2023. Our findings show that downstream firms with high-emission suppliers face a larger corporate bond yield spread following the implementation of the Paris Agreement. This spillover effect is particularly pronounced for firms with concentrated supplier bases, those relying heavily on trade credit, and those with substantial relationship-specific investments. Channel analysis reveals that firms with high-emission suppliers are more prone to credit rating downgrades and institutional investor divestment, which amplify bond yield spreads.