We examine how firms’ carbon risk management practices influence market assessment of their credit risk. Using two quasi-exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of US state climate adaptation plans, we find that stronger carbon risk management is associated with significantly lower CDS spreads. Our results are not driven by firm-level climate exposures, leverage, and social-, governance- or distress- risks. Firms with better carbon risk management also exhibit enhanced future growth opportunities and cash holdings, and lower subsequent carbon emissions. Overall, our paper highlights the importance of carbon risk management in mitigating credit risk.
Petko S. Kalev received his PhD in Financial Econometrics from Monash University in 2002. Petko is Professor of Finance in La Trobe University Business School since 29 March 2017. For the period of 15 of February 2010 until 28 of March 2017, Dr Kalev worked as a Professor in Finance and Director of the Centre for applied Financial Studies (CAFS) at the School of Commerce with the University of South Australia Business School. Prior to Petko was appointed as a Senior Lecture (Lecture) at the Department of Accounting and Finance in Monash University (January 1999 -February 2010). Professor Kalev has several research interests ranging from Asset Pricing, Market Microstructure, Corporate Finance, Quantitative Finance and Behavioural & Experimental Finance. He is most known and recognised for his empirical research contributions in Market Microstructure: asymmetric information and informed trading, market quality, price discovery and volatility modelling.
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