Thermal Stress and Financial Distress: Extreme Temperatures and Firms’ Loan Defaults in Mexico

The frequency and intensity of extreme weather events are likely to increase with climate change. Although a growing body of literature shows that extreme weather has a negative impact on economic outcomes, there is lack of evidence about how it affects firm’s credit delinquency and credit use. This question is relevant for Low and Middle Income Economies, where institutions are frequently less prepared to deal with informational asymmetries and credit market are frequently shallow. We fill this gap by exploiting an extraordinarily detailed data set with loan-level information for the universe of loans extended by commercial banks to private firms in Mexico. Exploiting differences across Mexican counties over time, we find that anomalous days of extreme temperature increase the rate of non-performing loans and that this result is mainly driven by extreme heat. The effect is concentrated in the agricultural sector but there is also a nonnegligible impact on the non-agriculture industries that are more dependent on local demand. Our results are consistent with general equilibrium effects originated in agriculture that expand to non-agriculture sectors in agricultural regions.