Climate risk: The price of drought
By Thanh D. Huynh, T. Nguyen, Cameron Truong. Journal of Corporate Finance, 2020
259 citations recorded by the source corpus.
Abstract We document a significant positive relation between drought risk and the cost of equity capital. Our estimation shows that the cost of equity capital is 92 basis points higher for firms affected by severe drought conditions. We provide evidence that when firms are affected by droughts, firms with higher local institutional holdings exhibit a higher cost of equity capital. This result supports the well-known local bias of institutional investors, and suggests that diversification cannot fully eliminate the loss in wealth caused by droughts. Consistent with theoretical predictions, we find that drought duration and drought intensity further increase a firm's risk premium. However, for firms with diversified cash flows/investments, geographically dispersed business operations, and high cash holdings, the impact of drought on the expected return is significantly lessened. Overall, our findings show that investors require a higher rate of returns on firms affected by droughts and offer implications on how firms can mitigate the impact of droughts on their cost of capital.
Subfields: Economics and Econometrics, Finance, Soil Science
View Paper: https://www.semanticscholar.org/paper/f401bb6b18ec0d62245b66a01174f61bbb026f53
Citations in the corpus
- The impact of climate change on the cost of bank loans (2020, unknown): “Among the natural disasters that might be intensified by climate change, drought is the most devastating for economic activities (Huynh et al. 2020; Hong et al. 2019; Lesk et al. 2016).”
- Investor rewards to environmental responsibility: Evidence from the COVID-19 crisis (2021, unknown): “Lins et al. (2017) show that firms with high CSR intensity experience higher stock returns during the 2008–2009 financial crisis, consistent with the trust between a firm and its stakeholders, built through investments in CSR, paying off when the level of trust in corporations suffers a negative sho”