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Is drought risk priced in private debt contracts?
Author(s) -
Do Viet,
Nguyen Thu Ha,
Truong Cameron,
Vu Tram
Publication year - 2021
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12294
Subject(s) - debt , business , loan , monetary economics , investment (military) , financial system , economics , finance , politics , political science , law
We investigate whether banks price drought risk in the interest rates charged to corporate borrowers. The results show that banks do charge drought‐affected borrowers higher loan spreads. The spread increase is most pronounced among food industry borrowers. Our findings are robust to alternative drought measures. We also document that lenders with more experience in lending to drought‐affected food borrowers charge a lower drought risk premium, and borrowers' credit rating of investment grade can act as a mitigating factor on drought risk effects. Our study highlights that externalities from local weather shocks are relevant to the private debt market.