What question did this study set out to answer?

To examine whether carbon risk is reflected in corporate bond pricing and to test the carbon risk premium hypothesis in debt markets.

June 20, 2023Journal of Financial and Quantitative AnalysisOpen Access

Is Carbon Risk Priced in the Cross Section of Corporate Bond Returns?

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Authors

TDTinghua DuanEcole des Hautes Etudes Commerciales du Nord FLFrank Weikai LiCity University of Hong Kong QWQuan WenGeorgetown University

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Implication

Cross-sectional analysis finds lower returns for carbon-intensive corporate bonds, suggesting investor underreaction to carbon-related risks rather than institutional divestment.

Key Points

To examine whether carbon risk is reflected in corporate bond pricing and to test the carbon risk premium hypothesis in debt markets.
Analyzed cross-sectional corporate bond returns against firm-level carbon intensity metrics.
Controlled for standard bond characteristics and exposure to established risk factors.
Evaluated potential mechanisms driving abnormal performance, including institutional divestment, cash-flow news, credit health, and environmental incidents.
Bonds issued by carbon-intensive firms earn significantly lower returns, directly contradicting the carbon risk premium hypothesis.
The underperformance produces a negative alpha that cannot be accounted for by bond risk characteristics, known factors, or institutional divestment.
The return discount is primarily driven by investor underreaction to the negative impact of carbon intensity on future corporate cash flows, creditworthiness, and environmental controversies.

Cite This Study

Duan et al. (2023) studied this question.

synapsesocial.com/papers/6a006e7d6018b8d0892dbb6d https://doi.org/10.1017/s0022109023000832

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Implication

Cross-sectional analysis finds lower returns for carbon-intensive corporate bonds, suggesting investor underreaction to carbon-related risks rather than institutional divestment.

Is Carbon Risk Priced in the Cross Section of Corporate Bond Returns?

Discussion

Member takes

Implication

Key Points

Cite This Study

Is Carbon Risk Priced in the Cross Section of Corporate Bond Returns?

Discussion

Member takes

Implication

Key Points

Cite This Study

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