Publication Type
Working Paper
Version
publishedVersion
Publication Date
9-2023
Abstract
This paper examines the pricing of a firm's carbon risk, measured by its carbon emissions intensity, in the cross-section of corporate bond returns. Contrary to the "carbon risk premium" hypothesis, we find bonds of firms with higher carbon emissions intensity earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon premium, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to carbon risk, as carbon emissions intensity is predictive of lower future cash flow news, deteriorating firm creditworthiness, and more frequent environmental incidents.
Keywords
Climate change, Carbon emissions, Corporate bond returns, ESG investing
Discipline
Corporate Finance | Environmental Sciences | Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
84
Identifier
10.2139/ssrn.3709572
Citation
DUAN, Tinghua; LI, Frank Weikai; and WEN, Quan.
Is carbon risk priced in the cross-section of corporate bond returns?. (2023). 1-84.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6606
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.3709572
Included in
Corporate Finance Commons, Environmental Sciences Commons, Finance and Financial Management Commons
Comments
Published in Journal of Financial and Quantitative Anlaysis (2023). DOI: 10.1017/S0022109023000832