This paper investigates how climate change risk influences corporate pension funding decisions. Based on the precautionary motive, we hypothesize that firms facing greater climate-related uncertainty will increase pension funding to protect against potential financial disruptions. Using 13,839 firm-year observations of U.S. publicly traded firms from 2001 to 2023, we find a positive correlation between climate risk exposure and pension funding. This finding remains consistent when using alternative variable definitions, restricted samples, and various methods to address endogeneity concerns. Further analyses reveal that the relation is stronger in firms with high earnings volatility, tighter financial constraints, and better governance. Cross-sectional evidence suggests that this association is stronger among firms with better environmental, social, and governance (ESG) performance, higher litigation risk, and greater exposure to climate risk at the state and industry levels. These findings imply that corporate pension funding is a significant aspect of firms’ responses to climate-related uncertainty, contributing to the literature on climate finance and corporate risk management.
This paper isolates changes in carbon emissions due to board independence reform mandates around the world, to shed new light on the role of governance in decarbonization using a large cross-country, sector-level panel data. Exploiting the staggered difference-in-difference approach as our identification, we find that carbon emissions significantly decline after the enactment of board independence reforms, especially in carbon-intensive sectors. Our findings suggest the financing channel potentially explains the reduction in carbon emissions post-board reforms. Our analysis also shows that the impact of board reforms on carbon emissions is stronger for carbon-intensive industries in civil law countries, collectivist societies, femininity-oriented economies, countries with pro-environmental attitudes, and economies with stronger environmental democracy. We also find that board reforms promote green innovation in carbon-intensive sectors. Overall, our study provides insights into the effectiveness and spillover effects of non-environmental policies on climate change mitigation and adaptation, adding to the ongoing discussions on the just transition towards a net-zero economy.
This study introduces a novel option-implied measure, BAVOLS, which is constructed from the bid-ask implied volatility spread of RMB FX options—a distinctive currency derivative in China’s financial market. BAVOLS is designed to capture the relative presence of informed traders who are optimistic about the future USD/CNY exchange rate versus those with pessimistic expectations. We demonstrate that BAVOLS positively predicts the USD/CNY spot exchange rate and negatively forecasts China’s macroeconomic conditions across multiple horizons. This pattern is consistent with the negative economic effects of RMB depreciation, manifested primarily through reduced imports and the resulting rise in domestic inflation. Furthermore, we show that a stock’s exposure to BAVOLS (BAVOLS beta) negatively predicts its future returns in the cross-section of the Chinese market. These findings suggest that BAVOLS embodies forward-looking information relevant to both macroeconomic fundamentals and equity pricing. The results are consistent with a rational hedging mechanism, wherein BAVOLS signals potential deterioration in macroeconomic conditions, prompting investors to engage in hedging activities within equity markets. Importantly, the predictive power of BAVOLS is not subsumed by the spot-rate measures or other related option-implied measures, underscoring its incremental information content.
In this paper we analyze the impact of shocks to global risk aversion on the term structure of sovereign spreads between emerging market economies (EMEs) and the US economy. Focusing on the difference between long- and short-term spreads (i.e. the term premium gap), we find that an increase in global risk aversion reduces the term premium gap. This finding is consistent with the evidence that, during crises, EMEs experience a higher risk of default with respect to safe advanced economies, and to a greater extent at shorter maturities.
