Global climate risk, cost of debt, and analyst forecast

Abstract

This research examines the impact of climate risk on firm financing related factors-cost of debt and analyst forecast -from a cross-country empirical perspective. The increasing influence of climate risk on economy and firm performance is realized by all market participants and triggers deeper concern on firm financing activities in high-climate-risk countries. In this paper, we propose that climate risk is positively associated with cost of debt. We believe the increased default risk and an unbalanced demand-supply relationship between investors and borrowers lead to the increase of cost of debt under high climate risk. Moreover, we investigate the moderating role of forecast accuracy and analysts following in the relationship between climate risk and cost of debt. We think that when firms have more accurate forecasts and more analysts following, their cost of debt will increase less under the same climate risk level. Empirically, We conduct mixed-effects models to tests the above proposition with a sample from 33 countries from the year 2004 to 2018. Our results show a nonsignificant relationship between climate risk and cost of debt and show significant negative moderating effects of forecast accuracy and analysts following on the relationship between climate risk and cost of debt.