A Bit Under the Weather? Flood Impacts and Firm Recovery in the Manufacturing Sector (with Mathilde Bossut)
| Available on SSRN |
The economic damages caused by extreme weather events are substantial, and their frequency and severity are expected to increase further with climate change. This paper analyses the impact of flood events on European manufacturing firms. Combining a highly granular identification strategy with the Local Projections Difference-in-Differences approach, we estimate firms’ dynamic average treatment responses to flood exposure. We find that flood-affected firms experience a 7.5% reduction in tangible fixed assets in the year following a flood, accompanied by declines in output and profitability. These adverse effects, however, are not persistent, as affected firms generally recover within three to four years. We further examine regional and firm-level heterogeneities to uncover the mechanisms underlying these effects. The adverse impacts of floods are substantially more severe and persistent for firms that were financially distressed prior to the event. This asymmetry is primarily driven by differences in access to external finance: financially stable firms can raise debt to rapidly replace damaged assets, whereas financially distressed firms face credit constraints, leading to more prolonged disruptions to their operations. Finally, firms located in regions with high levels of flood insurance protection recover more quickly, underscoring the role of insurance coverage in shaping firms’ resilience to floods.
Climate and Environmental Policy Risk and Debt (with Ulf Moslener)
| Available on SSRN |
This paper analyses how current climate policy and expectations about future policy stringency drive the impact of firms' carbon emissions on credit risk and bond pricing. Using corporate bond spreads, we find that risk premiums on carbon emissions increase with climate policy stringency. Higher anticipated stringency of future climate policies further amplifies the carbon risk premium, particularly for bonds with long maturities. An analysis of firm-level credit ratings yields consistent results, suggesting that the observed bond pricing effects are primarily driven by changes in default probabilities. Extending the scope to firms' environmental pollution, we find that the effects of various pollution types on both credit risk and bond spreads increase with the stringency of environmental policy. To address possible endogeneity problems, we exploit an exogenous climate policy shock in the EU, the announcement of the European Green Deal, and document an increase in bond spreads for high-carbon firms. Our findings highlight the importance of both the stringency of implemented climate regulation and expectations regarding future policy ambition in the pricing of carbon risks.
The paper received the Best Paper Award - Sustainability at the 5th Conference on Behavioral Research in Finance, Governance and Accounting (2023).
Environmental Conditions, Innovation Capacity, and the Transition to Agriculture (with Lothar Grall, Christian Haas, and Jürgen Meckl)
| Available on SSRN |
The shift from foraging to agriculture, the Neolithic transition, is a key episode in human history with long-term effects on comparative development. This paper proposes physiological and cognitive traits, induced by environmental conditions, as a hitherto neglected factor impacting the Neolithic transition. We develop an evolutionary growth theory based on insights from (evolutionary) biology and anthropology. The theory suggests that exposure to intergenerational variability of environmental conditions alters the evolutionary optimal allocation of hunter-gatherers' resources from offspring quantity to offspring quality. The resulting increase in innovation capacity of humans increases the rate of technological progress and ultimately facilitates the adoption of agricultural practices. We test the model's prediction using a novel cross-archaeological site dataset covering early Neolithic settlements in Europe, Asia, and northern Africa. By exploiting variation in long-term variability of environmental conditions long before the transition as an instrumental variable, we find evidence for a causal effect of the innovation capacity of hunter-gatherers on the timing of the transition to agriculture.
Effects of physical climate risks on firms in the agricultural sector (with Mathilde Bossut)
Climate stress testing (with Christian Haas, Ulf Moslener, Sebastian Rink)
Firm transition and financial risks (with Christian Haas)