Does carbon risk travel along the supply chain? Evidence from corporate default risk

Abstract

This study examines the effects of major customers’ carbon risk on the default risk of a firm. We find that a firm's default risk measured by distance-to-default is positively associated with its major customers’ carbon risk. Further analysis shows that this positive relationship is stronger for firms with weak fundamentals or heavy reliance on major customers. Our findings highlight the externality of carbon risk along the supply chains.