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.
Presentations and Awards: Baruch Finance Seminar (April 2020), ASSA Poster Session (January 2021), EFMA presentation and John A. Doukas Doctoral Best Paper Award (July 2021), IWFSAS (Aug 2021), 20th International Conference on Credit Risk Evaluation Poster Session (Sept 2021), IRMC (Oct 2021), FMA (Nov 2021), World Finance & Banking Symposium (Dec 2021), 15th Financial Risks International Forum (March 2022) ,58th Annual Eastern Finance Association Meeting (April 2022)
The Effect of ESG Disclosure on Corporate Investment Efficiency, with Joonsung Won
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.
Presentations and Awards: Baruch Finance Seminar (February 2021), Financial Markets and Corporate Governance Conference (FMCG) (April 2021), Best Graduate Paper Award FIASI-Gabelli School Student Research Competition on ESG (April 2021), Global Finance Association (May 2021), IWFSAS (Aug 2021), ICGS (Oct 2021), FMA (Nov2021), COP26 ESG and Climate Finance Conference (Nov 2021), EUROFIDAI (Dec 2021), Finance and Accounting (F&A) symposium at the Westminster Business School (June 2022)
Blog: https://blogs.worldbank.org/allaboutfinance/can-esg-disclosure-improve-investment-efficiency
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.
Presentations: Baruch Finance PhD Symposium (May 2020), Climate Exp0 (May 2021), EARE Workshop on Green Bonds and Environmental Finance (June 2022)
Shadow banks, non-bank lenders defined as unregulated non-depository institutions, currently dominate the U.S. residential mortgage market. Their market share has risen from 21% to 35% between 2007 and 2013, surpassing pre-crisis levels. In this paper, I examine empirically whether the rise of shadow banks in the mortgage market impacts systemic risk in the regulated banking system. I find that shadow banks' penetration increases systemic risk of small banks but reduces it for larger banks. Controlling for endogeneity, I find that a 10 percentage point increase in shadow banking penetration, similar to the one observed between 2007 and 2013, increases average systemic risk contributions by 23% for small banks with assets of $500 million. In contrast, for large banks with $1 trillion in assets, a 10 percentage point increase of shadow banks' market share is accompanied by an 80% reduction in systemic risk. These results suggest that shadow banks act as disruptive substitutes to small banks, but complement larger banks which subsequently reduce their systemic risk.
Presentations: Baruch Finance Seminar (March 2019), Banque de France Seminar DEMS (July 2019)
We examine green and ESG (or sustainability) linked loans which are general corporate purpose loans used to incentivize borrowers’ commitment to sustainability.