Is drought risk priced in private debt contracts?

Research output: Contribution to journalArticleResearchpeer-review

Abstract

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.

Original languageEnglish
Number of pages14
JournalInternational Review of Finance
DOIs
Publication statusAccepted/In press - 1 Jan 2020

Keywords

  • drought risk
  • food industry
  • lending experience
  • loan spreads

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