Is carbon risk priced in the cross section of corporate bond returns?
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 exposur...
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| Main Authors: | , , |
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| Format: | text |
| Language: | English |
| Published: |
Institutional Knowledge at Singapore Management University
2023
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/lkcsb_research/7367 https://ink.library.smu.edu.sg/context/lkcsb_research/article/8366/viewcontent/is_carbon_risk_priced_in_the_cross_section_of_corporate_bond_returns_pvoa_cc_by.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | 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. |
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