Abstract
We examine the effect of carbon emission and the CDS market reactions. The carbon credit risk affects the credit risk of the underlying firm through the policy uncertainty. We document a statistically and economically significant positive relation between scope 1 carbon emission and the single-name CDS premium. The CDS term structure rises with the increase of carbon emission, reflecting a relatively long-term concern on environmental policy implications on the firm’s downside risk. The proposed effect is more pronounced for firms with high financial constraints. The paper contributes to the ongoing asset pricing implications of implementing stricter ESG policies.
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