Is carbon risk priced in the cross-section of corporate bond returns?

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...

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Main Authors: DUAN, Tinghua, LI, Frank Weikai, WEN, Quan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2023
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/6606
https://ink.library.smu.edu.sg/context/lkcsb_research/article/7605/viewcontent/SSRN_id3709572.pdf
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spelling sg-smu-ink.lkcsb_research-76052023-12-18T01:59:01Z Is carbon risk priced in the cross-section of corporate bond returns? DUAN, Tinghua LI, Frank Weikai WEN, Quan 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. 2023-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/6606 info:doi/10.2139/ssrn.3709572 https://ink.library.smu.edu.sg/context/lkcsb_research/article/7605/viewcontent/SSRN_id3709572.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Climate change Carbon emissions Corporate bond returns ESG investing Corporate Finance Environmental Sciences Finance and Financial Management
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Climate change
Carbon emissions
Corporate bond returns
ESG investing
Corporate Finance
Environmental Sciences
Finance and Financial Management
spellingShingle Climate change
Carbon emissions
Corporate bond returns
ESG investing
Corporate Finance
Environmental Sciences
Finance and Financial Management
DUAN, Tinghua
LI, Frank Weikai
WEN, Quan
Is carbon risk priced in the cross-section of corporate bond returns?
description 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.
format text
author DUAN, Tinghua
LI, Frank Weikai
WEN, Quan
author_facet DUAN, Tinghua
LI, Frank Weikai
WEN, Quan
author_sort DUAN, Tinghua
title Is carbon risk priced in the cross-section of corporate bond returns?
title_short Is carbon risk priced in the cross-section of corporate bond returns?
title_full Is carbon risk priced in the cross-section of corporate bond returns?
title_fullStr Is carbon risk priced in the cross-section of corporate bond returns?
title_full_unstemmed Is carbon risk priced in the cross-section of corporate bond returns?
title_sort is carbon risk priced in the cross-section of corporate bond returns?
publisher Institutional Knowledge at Singapore Management University
publishDate 2023
url https://ink.library.smu.edu.sg/lkcsb_research/6606
https://ink.library.smu.edu.sg/context/lkcsb_research/article/7605/viewcontent/SSRN_id3709572.pdf
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