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Climate Regulatory Risk and Corporate Bonds

Author

Listed:
  • Lee H. Seltzer
  • Laura Starks
  • Qifei Zhu

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.

Suggested Citation

  • Lee H. Seltzer & Laura Starks & Qifei Zhu, 2022. "Climate Regulatory Risk and Corporate Bonds," NBER Working Papers 29994, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29994
    Note: AP
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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