Climate Regulatory Risks and Corporate Bonds

Environmental violations, refinancing risk, and the corporate bond cost in China

“…The environmental penalty, on average, results in the bond spreads to rise about 11% (= 0.241/2.189), comparing the average bond spreads before the firm being penalized. Our results are consistent with previous studies (e.g., Chava, 2014; Seltzer et al, 2021), implicating that investors in the bond market are concerned about the firms' environmental irresponsibility activities, and the penalty for environmental violations would be considered into the pricing of the bond and charge for a risk premium.…”

“…Second, we analyze the effect of refinancing constraints imposed on the penalized firms on the relation between environmental performance and the cost of capital. Previous literature (e.g., Chava, 2014;Seltzer et al, 2021) has focused on the effect of market factors such as the change of ownership on this relation, while our research finds a new channel through which firms' environmental risk affects the cost of capital. More importantly, regarding the growing concerns of global society about global warming and environmental deterioration, governments are increasingly tightening their environmental regulations, which implicates higher environmental regulatory risk.…”

“…On the other side, the firm with poor environmental performance always has a larger probability to be penalized for environmental pollutions. To mitigate this endogenous problem, as Seltzer et al (2021) did, we use the Paris Agreement as an exogenous impact. China signed the Paris Agreement on April 22, 2016, and after that the Chinese government implemented stricter regulations on environmental pollutions.…”

“…First, we expand related studies about the cost of capital with respect to environmental responsibility. Previous studies found that firms' environmental responsibility investment and good environmental performance have a significantly negative relation with the cost of equity, borrowing interest rate, and spread of bond (Chava, 2014; Erragragui, 2018; Seltzer et al, 2021; Zerbib, 2019). Our conclusions are consistent with previous studies, but we confirm the relation from the perspective of environmental penalties, which can help investors to understand the downside risk of firms' environmental irresponsibility activities.…”

Corporate social performance and firm debt levels: Impacts of the covid-19 pandemic and institutional environments

“…Better CSP firms are also awarded relatively high ratings by credit rating agencies ( Attig et al, 2013 ; Oikonomou et al, 2014 ). Seltzer et al, (2020) provide evidence that firms with better environmental performance tend to have higher credit ratings and lower yield spreads, especially when they are located in states with more stringent environmental regulations. These firms, in turn, have better access to financing with a lower cost of capital ( Gao et al, 2021 ; La Rosa et al, 2018 , Bolton and Kacperczyk, 2020, Pastor et al, 2020).…”