We study how risk management through hedging impacts firms and competition among firms in the life insurance industry - an industry with over 7 Trillion in assets and over 1,000 private and public firms. We examine firms after a staggered state-level reform that reduces the costs of hedging by granting derivatives superpriority in case of insolvency. We show that firms that are likely to face costly external finance increase hedging and reduce risk and the probability of receivership. Firms that are likely to face costly external finance, also lower prices, increase policy sales and increase their market share post reform.

Nonprofit banks in the U.S. are primarily organized as credit unions (CUs) and have grown steadily over the last two decades, increasing their share of total lending to U.S. households. This paper studies the economic effects of banking with CUs using consumer credit report data merged to administrative data on originated mortgages and detailed data on the locations and balance sheets of CUs. To estimate causal effects, I construct a novel instrument for banking with a CU using a distance-weighted density measure of nearby CUs. I find that banking with a CU causes borrowers to have fewer mortgage delinquencies, higher credit scores, and a lower risk of bankruptcy several years later. I find support for several mechanisms behind these results: CUs charge lower interest rates, price in less risk-sensitive ways, are less likely to resell their originated mortgages in the secondary market, and are more likely to accommodate borrowers that become past due. These results suggest that CUs behave differently than for-profit banks, that many consumers experience different outcomes by banking with CUs, and are inconsistent with CUs behaving as ``for-profits in disguise."

Real-world contractual agreements between firms are often incomplete, leading to suboptimal investment and loss of value in supply-chain relationships. To what extent can blockchain technology help alleviate problems arising from contractual incompleteness? We examine this issue by exploiting a quasi-natural experiment based on the staggered adoption of U.S. state laws that increased firms’ in-state ability to develop, adopt, and use blockchain technology. We find that, after exposure to a pro-blockchain law, firms with greater asset specificity exhibit more positive changes to Tobin’s Q, R&D, and blockchain-related innovation. Also, such firms appear to rely less on vertical integration, form more strategic alliances, and shift their emphasis to less geographically proximate customers. Overall, our results suggest that blockchain technology can help firms remedy constraints and inefficiencies arising from contractual incompleteness.

We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal and corporate bonds as well as in equity markets. We find consistent evidence across asset classes that local exposure to heat stress is associated with higher yield spreads for bonds, especially for lower-quality and longer-maturity bonds, as well as higher conditional expected returns for stocks. These results are observed robustly starting in 2013–15, and are consistent with macroeconomic models where climate change has a direct negative impact on aggregate consumption.

This paper analyzes how climate risks are priced on financial markets. We show that climate tipping thresholds, disagreement about climate risks, and preferences that price in long-run risks are crucial to an understanding of the impact of climate change on asset prices. Our model simultaneously explains several findings that have been established in the empirical literature on climate finance: (i) news about climate change can be hedged in financial markets, (ii) the share of green investors has significantly increased over the past decade, (iii) investors require a positive, although small, climate risk premium for holding "brown'' assets, and (iv) "green'' stocks outperformed "brown'' stocks in the period 2011--2021. The model can also explain why investments to slow down climate change have been small in the past. Finally, the model predicts a strong, non-linear increase in the marginal gain from carbon-reducing investments as well as in the carbon premium if global temperatures continue to rise.

Carbon-intensive firms have been underperforming in the U.S. despite their higher carbon transition risk. The brown-minus-green return spread, or carbon return, is zero on average globally but varies significantly across countries with unexpected cash flow shocks and climate taste shifts. The lower carbon return in developed markets reflects stronger growth in climate concerns instead of a lower expected carbon return. Additionally, countries with civil laws, more renewable energy, and tighter climate policies exhibit higher carbon returns. The inference differs from previous studies because I relate stock returns to lagged carbon measures, avoiding the issue of forward-looking bias.

We introduce investors with preferences for green assets to a general equilibrium setting in which they also prefer consuming green goods. Their preference for green goods induces consumption premia on expected returns, which counterbalance the green premium stemming from their preferences for green assets. Because they provide a hedge when green goods become expensive, brown assets command lower consumption premia, while green investors allocate a larger share of their portfolios towards them. Empirically, the green-minus-brown consumption premia differential reached 30-40 basis points annually, and con- tributes to explaining the limited impact of green investing on the cost of capital of polluting firms.

We study ESG and non-ESG mutual funds managed by overlapping teams. We find that non-ESG mutual funds include more high ESG stocks after the creation of an ESG sibling, and the high ESG stocks they select exhibit superior performance. The low ESG stocks selected by ESG siblings also exhibit superior performance and despite being more constrained, the ESG funds outperform their non-ESG siblings. The latter result is consistent with fund families making choices that favor ESG funds. Specifically, ESG funds tend to trade illiquid stocks prior to their non-ESG siblings and get preferential IPO allocations.

Flooding is the most costly natural disaster in the US. To protect collateral value against flood risk, many mortgage borrowers are thus required by law to maintain flood insurance. However, compliance is loosely enforced and lapsed policies are common. This paper hypothesizes that with a high monitoring cost borne by lenders, credit supply will depend on borrowers' insurance incentives. Exploiting an exogenous premium rise ($266 per year) which disincentivizes some borrowers to buy flood insurance, I show that lenders increase the corresponding mortgage denial rates by 0.8 percentage points (3.54% of the mean). This effect is gigantic, 80 times larger than that of lowering a borrower's annual income by $266. I rule out alternative demand-side explanations and provide evidence to support the mechanism that lenders internalize ex-post monitoring costs into ex-ante restrictions on credit supply.

We show that U.S. firms cut imports by 11.1% and are 4.2% more likely to terminate a trade relationship when their international suppliers are hit by environmental and social (E&S) scandals. These trade cuts are larger for publicly-listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation, suggesting that E&S preferences in capital markets can have real effects in far-flung economies. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade. Our results highlight the role of customers’ exit in ensuring suppliers’ E&S compliance along global supply chains.

We study how institutional investors that join climate-related investor initiatives are actively decarbonizing their equity portfolios. Decarbonization could be achieved by re-weighting portfolios towards lower carbon emitting firms or alternatively via targeted engagements with portfolio companies to reduce their emissions. Our analysis suggests that portfolio re-weighting is the predominant strategy to green their portfolios, in particular by investors based in countries with carbon emissions pricing schemes. We do not uncover much evidence of engagement even after the 2015 Paris Agreement. Furthermore, we find no evidence that climate-conscious investors allocate capital towards firms developing climate patents, but they do re-weight towards firms starting to generate green revenues. Overall, our analysis raises doubts about the effectiveness of investor-led initiatives in reducing corporate emissions and helping an all-economy transition to “green the planet”.

This paper studies the systematic effect of environmental regulations on firms by constructing a time-varying and industry-specific measure of EPA regulatory restrictions over 1974-2021. Identifying industries in years that experience significant changes in regulation restrictions, we find that stricter EPA regulations are associated with an improvement in firm value. Investigating the potential underlying mechanism, we find that the positive valuation effect is more pronounced for firms with myopic managers or weak shareholder monitoring, where agency frictions hinder value-enhancing investments. We further find that stricter EPA regulations induce green innovations and increase the marginal performance of R&D in regulated firms, reflecting an increase in innovation incentives. Collectively, our findings suggest an unintended benefit of stricter environmental regulations: serving as an external governance mechanism by holding managers accountable for their decisions, and in turn, reducing agency frictions to induce value-enhancing investments.

We study the conditions under which debt securities that make the cost of debt contingent on the issuer's carbon emissions, similar to sustainability-linked loans and bonds, can be equivalent to a carbon tax. We propose a model in which standard and environmentally-oriented agents can adopt polluting and non-polluting technologies, with the latter being less profitable than the former. A carbon tax can correct the laissez-faire economy in which the polluting technology is adopted by standard agents, but requires sufficient political support. Carbon-contingent securities provide an alternative price incentive for standard agents to adopt the non-polluting technology, but require sufficient funds to fully substitute the regulatory tool. Absent political support for the tax, carbon-contingent securities can only improve welfare, but the same is not true when some support for a carbon tax exists. Understanding the conditions under which the regulatory and capital market tool are substitutes or complements within one economy is an important stepping stone in thinking about carbon pricing globally. It sheds light, for instance, on how developed economies can deploy finance to curb carbon emissions in developing economies where support for a carbon tax does not exist.

This paper investigates how the environmental liability of lenders affects debtors’ behavior. I use U.S. Census Bureau micro-data and the passage of the Lender Liability Act as a novel identification strategy to answer this question. Firms increase on-site pollution, cut investment in abatement technology, and incur 17.54% more environmental regulatory violations when secured lenders become less responsible for the cleanup cost of their collateral. This lower environmental compliance slightly benefits employment, but does not change wages or production. Overall, reduced lender liability lessens banks’ incentives to influence the environmental practices of their debtors with limited benefit on economic growth.

We investigate the impact of three non-climate environmental criteria: biodiversity, water, and pollution prevention, on infrastructure firms' credit risk term structure from the perspective of double materiality. Our findings show that firms that effectively manage these three environmental risks to which they are materially exposed have up to 93bps better long-term refinancing conditions compared to the worst-performing firms. While the results are less significant for the firm's material impact on the environment, investors still reward the management of these criteria beyond climate with improved long-term financing conditions for infrastructure investments. Overall, we find that financial markets respond positively to the prospect of more stringent regulations related to these criteria, which are currently used by the EU Taxonomy to assess the sustainability of investments.

We study the relationship between corporate taxation and carbon emissions in the U.S. We show that dirty firms pay lower profit taxes. This relationship is driven by dirty firms benefiting disproportionately more from the tax shield of debt due to their higher leverage. In addition, we document that the higher leverage of dirty firms is fully accounted for by the larger share of tangible assets owned by such firms. We build a general-equilibrium multi-sector economy and show that a revenue-neutral increase in profit taxation could lead to large decreases in aggregate carbon emissions without any noticeable change in GDP.

This paper exploits the operation of a sea wall built to protect the city of Venice from increasingly high tides to provide evidence on the capitalization of public infrastructure investment in climate change adaptation into housing values. Properties above the sea wall activation threshold experience a permanent reduction in flood risk and expected damages, which are reflected in higher prices. Using a difference-in-differences hedonic design we show that the sea wall led to a 4.5% increase in the value of the residential housing stock in Venice, which is a lower bound on the total welfare gains generated by the infrastructure.

We study the link between exposure to pollution information and investment portfolio allocations, exploiting the rollout of air quality monitoring stations during 2006-2019 in India. Using a triple-difference framework, we show that retail investors' investments in ``brown'' stocks become more negatively related to local air pollution after a monitoring station appears nearby. Since green stocks do not outperform brown stocks over this period, we suggest that our findings are likely driven by investor tastes and pollution salience rather than a shift in expected returns.The effect of pollution information on investment choices is most prominent amongst tech-savvy investors who are most plausibly ``treated'' by real-time pollution data, and by younger investors who tend to be more sensitive to environmental concerns. Overall, our results provide micro-level support for the view that salience of environmental conditions affect investors' tastes for green versus brown investments.