Date of Degree

6-2021

Document Type

Dissertation

Degree Name

Ph.D.

Program

Business

Advisor

Linda Allen

Committee Members

Sonali Hazarika

Brandon Lock

Lin Peng

Jun Wang

Subject Categories

Finance | Finance and Financial Management

Keywords

Climate Change, ESG, Sustainability, Bonds, Investment

Abstract

Chapter 1: Pricing Climate Change Risk in Corporate Bonds

Using a firm’s geographic footprint to measure its exposure to sea level rise (SLR), I find that corporate bonds bear a climate risk premium upon issuance. A one standard deviation increase in firms’ SLR exposure is associated with a 7 basis point premium, representing a 3% increase in average yield spread. This effect is more pronounced for geographically concentrated firms, within industries vulnerable to extreme weather conditions, and after the Paris Agreement. I do not find evidence that credit rating agencies account for SLR exposure at bond issuance. Results are robust to placebo tests and inverse propensity weighting to address possible endogeneity.

Chapter 2: External Reviews and Green Bond Credibility

In an effort to alleviate greenwashing concerns, firms are increasingly commissioning voluntary external reviews and certifications of their green bond issues. This paper examines the role of external parties in reducing information asymmetry in the green bond market and the ensuing effects on green bond pricing. Initial evidence does not suggest that external reviews, on average, provide issuers with at-issue funding cost reductions. In subsequent analyses, we find that external reviews reduce at-issue costs for green issuers domiciled in common law countries, including the United States. Specifically, these issuers benefit from a 0.5 percentage point lower greenium (i.e., the difference between the yield on a green bond and the yield on a similar conventional bond). Funding costs are lowest when issuers obtain external reviews from audit firms or rating agencies. Overall, our results suggest that the pricing implications of green bond external reviews depend crucially on both the location of the green issuer and the reputation of the external reviewer.

Chapter 3: The Effect of ESG Disclosure on Corporate Investment Efficiency

This paper examines the effects of environmental, social and governance (ESG) disclosure on investment efficiency, using the adoption of Directive 2014/95/EU as a quasi-natural shock on disclosure quality. We document a significant and robust reduction of underinvestment for U.S. firms with significant activities in the EU, which exposes them to the Directive, relative to U.S. firms not affected. These firms are able to raise additional debt after the adoption of the Directive, although there is no evidence of any impact on new capital raised in equity markets. In addition, investment efficiency gains are strongest for firms with ex-ante lower ESG disclosure levels, that are financially constrained, and for firms with more entrenched managers. These results suggest that non-financial disclosure requirements can play a role in mitigating adverse selection problems for underinvesting firms, especially in debt markets, in a manner similar to disclosure of financial information.

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