Abstract
Our work broadens the research issue to include external risk, which affects investors’ investment decisions. In this study, I explicitly employ corporate bond data from the FISD dataset to answer two crucial research questions: (1) Is policy uncertainty detrimental to corporate investment, resulting in high debt costs? (2) Do investors factor in firms’ carbon-related risk exposures through bond issuance costs when making lending decisions?In the first essay, “Policy Uncertainty and Corporate Bond Issuance Costs”. Using a comprehensive dataset of corporate bonds issued from 1985 to 2020, this paper investigates the effect of policy uncertainty on offering yield spreads. The empirical evidence shows a significant negative impact of policy uncertainty on offering yield spreads of bonds. The adverse impact of policy uncertainty is more severe for firms with higher exposure to tax policy, greater dependence on external finance, and a less transparent information environment. The effect is stronger in weaker economic conditions. Bond covenants moderate the negative impact as covenants provide a trigger for renegotiation. Further, the evidence shows that the negative effect of policy uncertainty on corporate investment works through the uncertainty premium in the bond market.
In the second essay, “Carbon Risks and Bond Issuance Costs”. The potential impact of climate change and transition risks may expose firms with high carbon footprints to downside risks, leading to higher debt costs. I test this hypothesis by investigating the relationship between bond offering yield spreads and firm-level carbon emission intensity. The empirical evidence shows that the offering yield spreads are higher for bonds issued by carbon-intensive issuers. Socially responsible ownerships are negatively associated with the carbon risk premium. And the negative impact of carbon intensity is due to carbon-intensive issuers' higher exposure to regulatory risks, physical risks, and financial constraints. Using the Paris Agreement as a salient shock, I provide evidence that investors began to price the carbon risk in the primary bond market post-Paris.
This paper is the first to examine how policy uncertainty and firm-level carbon risk are priced in the primary bond market. According to the findings, policy uncertainty and carbon risk are positively associated with bond issuance costs. I also present fresh empirical evidence that a policy uncertainty risk premium may induce delayed investment. In addition, I show that the carbon risk premium can be explained by investor preferences and market sentiment. More specifically, our evidence shows that investors are willing to sacrifice their return in the primary market to satisfy their tastes for climate-friendly firms.
| Date of Award | 7 Jul 2023 |
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| Original language | English |
| Awarding Institution |
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| Supervisor | Xiaoguang Yang (External Supervisor) & Junbo WANG (Supervisor) |