Climate risk and corporate bond credit spreads

Abstract

This paper examines the impact of physical climate risk on corporate bond credit spreads in the Chinese market. Using a dataset of 30,087 bond-month observations from 2008 to 2023, we find that climate risk significantly increases bond credit spreads. Climate risk increases corporate default risk by reducing internal cash flows and increasing external financing constraints, thereby resulting in wider bond credit spreads. Cross-sectional tests show that the impact is more pronounced in bonds with longer maturity, firms in climate-sensitive sectors, firms with less transparent information environment, firms with more concentrated supply chains, and firms located geographically closer. Furthermore, we find that investor attention and corporate proactive risk management efforts could moderate the impact of climate risk. Our findings underscore the implications of climate risk management for corporate bond pricing.