Real Effects of Climate Policy: Financial Constraints and Spillovers

Abstract: We document that localized policies designed to mitigate climate risk can lead to regulatory arbitrage by firms, resulting in unintended consequences. Using detailed plant-level data, we investigate the impact of the most extensive regional climate policy in the United States, the California cap-and-trade program, on corporate real activities such as greenhouse gas emissions and plant ownership. We show that industrial plants governed by the policy reduce emissions in California when the parent company is financially constrained, but that these firms internally reallocate their emissions to plants located in other states. Similarly, constrained firms are more likely to reduce ownership in Californian plants and increase ownership in plants outside California. In contrast, unconstrained firms generally do not ad-just plant emissions and ownership either in California or in other states. Overall, firms do not reduce their total emissions when part of their assets are affected by the regulation, but in fact, increase them if financially constrained. The results document real spillover effects stemming from resource reallocations by constrained firms to avoid regulatory costs, undermining the effectiveness of localized policies. Our study has important implications for the current debate on global climate policy agreements.

Authors: Söhnke M. Bartram, Kewei Hou, Sehoon Kim

Date: October 7, 2018; Last revised: October 22, 2019

Click here to read this paper

What Drives Global Lending Syndication? Effects of Cross-Country Capital Regulation Gaps

Abstract: We examine how cross-country differences in capital regulations shape the structure of global lending syndicates. Using globally syndicated loans extended by banks from 44 countries, we find that strictly regulated banks participate more in syndicates originated by lead lenders facing less stringent capital regulations. This finding is consistent with the explanation that strictly regulated banks seek risky deals outside the border and loosely regulated banks have an advantage to procure such deals. Accordingly, lending syndicates involving loosely regulated lead arrangers and strictly regulated participants extend loans to riskier borrowers, charge higher spreads, and incur higher default rates. The effect of regulatory differences is mitigated when participants are subject to higher accounting standards, and amplified when the participant and lead banks share prior syndicate relations. Finally, we show that global syndication exposes both participants and lead arrangers to greater systemic risk.

Authors: Janet Gao, Yeejin Jang

Date: August 21, 2019

Click here to read this paper

The Use of Multiple Risk Management Strategies: Evidence from the Natural Gas Industry

Abstract: Starting in 1978 and continuing throughout the 1980s, natural gas pipelines faced a series of regulatory changes, including price deregulation, which changed their exposures to price and quantity risk. We exploit this unique environment and examine cross-sectional and time-series patterns in the use of multiple risk management strategies by pipeline companies. Natural gas pipelines use a combination of such strategies, including gas storage, cash holdings, line-of-business and geographic diversification, and commodity derivatives to hedge their increasing risks. Gas storage shows a complementary relation to holding cash and using derivatives to mitigate these risks. However, differences in the financial characteristics of derivatives hedgers and storage hedgers suggest that firms use derivatives to manage price risk and store gas to manage volume risk. Derivatives hedgers are similar to firms that diversify. In addition, firms that engage in hedging activities have smaller and less variable sensitivities to price changes than firms that do not, especially post-deregulation.

Author: Christopher C. Géczy, Benadette A. Minton, Catherine Schrand

Date: May 11, 2006

Click here to view translation