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Is drought risk priced in private debt contracts?

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  • Viet Do
  • Thu Ha Nguyen
  • Cameron Truong
  • Tram Vu

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.

Suggested Citation

  • Viet Do & Thu Ha Nguyen & Cameron Truong & Tram Vu, 2021. "Is drought risk priced in private debt contracts?," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 724-737, June.
    • Handle: RePEc:bla:irvfin:v:21:y:2021:i:2:p:724-737
    DOI: 10.1111/irfi.12294
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    References listed on IDEAS

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    3. Pinto-Gutiérrez, Cristian A., 2023. "Drought risk and the cost of debt in the mining industry," Resources Policy, Elsevier, vol. 83(C).
    4. Christofer Adrian & Mukesh Garg & Anh Viet Pham & Soon-Yeow Phang & Cameron Truong, 2023. "Do Natural Disasters Affect Corporate Tax Avoidance? The Case of Drought," Journal of Business Ethics, Springer, vol. 186(1), pages 105-135, August.
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    6. Thao Nguyen & Min Bai & Greg Hou & Cameron Truong, 2022. "Drought risk and capital structure dynamics," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3397-3439, September.

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