Publication Type
Journal Article
Version
publishedVersion
Publication Date
6-2023
Abstract
This article examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms 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 alpha, 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 the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.
Keywords
Climate change, Carbon emissions, Corporate bond returns, ESG investing
Discipline
Corporate Finance | Environmental Sciences | Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Financial and Quantitative Analysis
First Page
1
Last Page
35
ISSN
0022-1090
Identifier
10.1017/S0022109023000832
Publisher
Cambridge University Press
Citation
DUAN, Tinghua; LI, Frank Weikai; and WEN, Quan.
Is carbon risk priced in the cross section of corporate bond returns?. (2023). Journal of Financial and Quantitative Analysis. 1-35.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7367
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Additional URL
https://doi.org/10.1017/S0022109023000832
Included in
Corporate Finance Commons, Environmental Sciences Commons, Finance and Financial Management Commons, Portfolio and Security Analysis Commons