IDEAS home Printed from https://ideas.repec.org/a/eee/jrpoli/v83y2023ics030142072300435x.html
   My bibliography  Save this article

Drought risk and the cost of debt in the mining industry

Author

Listed:
  • Pinto-Gutiérrez, Cristian A.

Abstract

We examine the impact of a borrower's vulnerability to drought risks on loan contracts in the mining industry. Our analysis of a sample of 675 loans between 1995 and 2018 demonstrates that mining companies that are impacted by droughts face significantly higher loan spreads. Additionally, we find that the association between drought exposure and loan spreads is more pronounced for larger and longer-term loans. These findings provide evidence that externalities from climate-related events are relevant in the private debt market and that banks consider climate risks when making lending decisions to borrowers who cannot mitigate the risks through relocation, such as those in the mining industry.

Suggested Citation

  • Pinto-Gutiérrez, Cristian A., 2023. "Drought risk and the cost of debt in the mining industry," Resources Policy, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:jrpoli:v:83:y:2023:i:c:s030142072300435x
    DOI: 10.1016/j.resourpol.2023.103724
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S030142072300435X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.resourpol.2023.103724?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    2. Zoran Ivkovi & Scott Weisbenner, 2007. "Information Diffusion Effects in Individual Investors' Common Stock Purchases: Covet Thy Neighbors' Investment Choices," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1327-1357.
    3. Javadi, Siamak & Masum, Abdullah-Al, 2021. "The impact of climate change on the cost of bank loans," Journal of Corporate Finance, Elsevier, vol. 69(C).
    4. Hong, Harrison & Kubik, Jeffrey D. & Stein, Jeremy C., 2008. "The only game in town: Stock-price consequences of local bias," Journal of Financial Economics, Elsevier, vol. 90(1), pages 20-37, October.
    5. Robert J. Barro, 2015. "Environmental Protection, Rare Disasters and Discount Rates," Economica, London School of Economics and Political Science, vol. 82(325), pages 1-23, January.
    6. Lin, Chen & Ma, Yue & Malatesta, Paul & Xuan, Yuhai, 2011. "Ownership structure and the cost of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 100(1), pages 1-23, April.
    7. Corey Lesk & Pedram Rowhani & Navin Ramankutty, 2016. "Influence of extreme weather disasters on global crop production," Nature, Nature, vol. 529(7584), pages 84-87, January.
    8. Hilary, Gilles & Hui, Kai Wai, 2009. "Does religion matter in corporate decision making in America?," Journal of Financial Economics, Elsevier, vol. 93(3), pages 455-473, September.
    9. Naiwei Chen & Wan-Ting Wang, 2012. "Kyoto Protocol and capital structure: a comparative study of developed and developing countries," Applied Financial Economics, Taylor & Francis Journals, vol. 22(21), pages 1771-1786, November.
    10. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
    11. George M. Korniotis & Alok Kumar, 2013. "State-Level Business Cycles and Local Return Predictability," Journal of Finance, American Finance Association, vol. 68(3), pages 1037-1096, June.
    12. Ehlers, Torsten & Packer, Frank & de Greiff, Kathrin, 2022. "The pricing of carbon risk in syndicated loans: Which risks are priced and why?," Journal of Banking & Finance, Elsevier, vol. 136(C).
    13. Robert J. Barro, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 823-866.
    14. Ravi Bansal & Dana Kiku & Marcelo Ochoa, 2016. "Price of Long-Run Temperature Shifts in Capital Markets," NBER Working Papers 22529, National Bureau of Economic Research, Inc.
    15. Mudd, Gavin M., 2010. "The Environmental sustainability of mining in Australia: key mega-trends and looming constraints," Resources Policy, Elsevier, vol. 35(2), pages 98-115, June.
    16. Painter, Marcus, 2020. "An inconvenient cost: The effects of climate change on municipal bonds," Journal of Financial Economics, Elsevier, vol. 135(2), pages 468-482.
    17. Loughran, Tim & Schultz, Paul, 2005. "Liquidity: Urban versus rural firms," Journal of Financial Economics, Elsevier, vol. 78(2), pages 341-374, November.
    18. Huynh, Thanh D. & Nguyen, Thu Ha & Truong, Cameron, 2020. "Climate risk: The price of drought," Journal of Corporate Finance, Elsevier, vol. 65(C).
    19. Salem, Jorge & Amonkar, Yash & Maennling, Nicolas & Lall, Upmanu & Bonnafous, Luc & Thakkar, Khyati, 2021. "An analysis of Peru: Is water driving mining conflicts?," Resources Policy, Elsevier, vol. 74(C).
    20. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
    21. repec:hal:spmain:info:hdl:2441/75koqefued8i7pihbrl9u84p4u is not listed on IDEAS
    22. Christo Pirinsky & Qinghai Wang, 2006. "Does Corporate Headquarters Location Matter for Stock Returns?," Journal of Finance, American Finance Association, vol. 61(4), pages 1991-2015, August.
    23. 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.
    24. Sun, Yongping & Yang, Ying & Huang, Nan & Zou, Xin, 2020. "The impacts of climate change risks on financial performance of mining industry: Evidence from listed companies in China," Resources Policy, Elsevier, vol. 69(C).
    25. Hong, Harrison & Li, Frank Weikai & Xu, Jiangmin, 2019. "Climate risks and market efficiency," Journal of Econometrics, Elsevier, vol. 208(1), pages 265-281.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Javadi, Siamak & Masum, Abdullah-Al, 2021. "The impact of climate change on the cost of bank loans," Journal of Corporate Finance, Elsevier, vol. 69(C).
    2. 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.
    3. Huynh, Thanh D. & Nguyen, Thu Ha & Truong, Cameron, 2020. "Climate risk: The price of drought," Journal of Corporate Finance, Elsevier, vol. 65(C).
    4. Siamak Javadi & Abdullah‐Al Masum & Mohsen Aram & Ramesh P. Rao, 2023. "Climate change and corporate cash holdings: Global evidence," Financial Management, Financial Management Association International, vol. 52(2), pages 253-295, June.
    5. Bonato, Matteo & Cepni, Oguzhan & Gupta, Rangan & Pierdzioch, Christian, 2023. "Climate risks and state-level stock market realized volatility," Journal of Financial Markets, Elsevier, vol. 66(C).
    6. Massimiliano Caporin & Petre Caraiani & Oguzhan Cepni & Rangan Gupta, 2024. "Predicting the Conditional Distribution of US Stock Market Systemic Stress: The Role of Climate Risks," Working Papers 202407, University of Pretoria, Department of Economics.
    7. Ma, Rui & Marshall, Ben R. & Nguyen, Hung T. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2022. "Climate events and return comovement," Journal of Financial Markets, Elsevier, vol. 61(C).
    8. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, vol. 106(3), pages 547-565.
    9. Akter, Maimuna & Cumming, Douglas & Ji, Shan, 2023. "Natural disasters and market manipulation," Journal of Banking & Finance, Elsevier, vol. 153(C).
    10. Ding, Xiaoya (Sara) & Ni, Yang & Rahman, Abdul & Saadi, Samir, 2015. "Housing price growth and the cost of equity capital," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 283-300.
    11. 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.
    12. Carosi, Andrea, 2016. "Do local causations matter? The effect of firm location on the relations of ROE, R&D, and firm SIZE with MARKET-TO-BOOK," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 388-409.
    13. Baschieri, Giulia & Carosi, Andrea & Mengoli, Stefano, 2015. "Local IPOs, local delistings, and the firm location premium," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 67-83.
    14. Bo Becker & Zoran Ivković & Scott Weisbenner, 2011. "Local Dividend Clienteles," Journal of Finance, American Finance Association, vol. 66(2), pages 655-683, April.
    15. Xiaoran Huang & Zheng Qiao & Lei Zhang, 2021. "The real effects of institutional spatial concentration," Financial Management, Financial Management Association International, vol. 50(4), pages 1113-1167, December.
    16. Mariassunta Giannetti & Tracy Yue Wang, 2016. "Corporate Scandals and Household Stock Market Participation," Journal of Finance, American Finance Association, vol. 71(6), pages 2591-2636, December.
    17. Matteo Bonato & Oguzhan Cepni & Rangan Gupta & Christian Pierdzioch, 2024. "Business applications and state‐level stock market realized volatility: A forecasting experiment," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(2), pages 456-472, March.
    18. Bellocca, Gian Pietro Enzo & Poncela Blanco, Maria Pilar, 2024. "Extreme temperatures and the profitability of large European firms," DES - Working Papers. Statistics and Econometrics. WS 44217, Universidad Carlos III de Madrid. Departamento de Estadística.
    19. Xingqiang Du, 2015. "Does Confucianism Reduce Minority Shareholder Expropriation? Evidence from China," Journal of Business Ethics, Springer, vol. 132(4), pages 661-716, December.
    20. Afees A. Salisu & Ahamuefula E.Oghonna & Rangan Gupta & Oguzhan Cepni, 2024. "Energy Market Uncertainties and US State-Level Stock Market Volatility: A GARCH-MIDAS Approach," Working Papers 202409, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Climate change; Drought; Bank loans; Loan spreads;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:83:y:2023:i:c:s030142072300435x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30467 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.