Research

Job Market Paper

Resistance and Arbitrage: International Trade in Brown Loans

Draft

I develop a novel measure of carbon sensitivity in lending to assess reductions in portfolio exposure to brown assets. Using syndicated loan data, I show that countries with greater resistance to brown lending, proxied by economic development, experience faster shifts in the sectoral composition of loan portfolios. The decarbonization is driven primarily by domestic credit reallocation. I find consistent evidence of risk transfers to less regulated lenders and foreign countries, indicating arbitrage and incomplete regulations. Furthermore, lenders’ climate risktaking and transfer behaviors vary sharply by syndicate role, loan type, and specialization. The existence of international trade in brown loans has important implications for supervisory evaluation. Using the European Central Bank’s climate guide, I show that accounting for regulatory leakage reveals effects contrary to common wisdom.

Working Paper

International Trade in Brown Shares and Economic Development

with Harald Benink, Harry Huizinga, and Louis Raes. CEPR VoxEU

Using global share ownership data from 2002 to 2021, we find that investors’ aggregate carbon sensitivity, i.e. their tendency to divest from more polluting firms, increases with per capita GDP. Especially investment managers, who invest on behalf of their clients, and investors with longer investment horizons contribute to the portfolio greening effect of economic development. We find that this effect is weaker for smaller firms and for firms that are included in the MSCI World Index. By acting as backstop owners of brown equities, investors in poorer countries could limit the impact of divestment of such equities in richer countries.

Work in Progress

The ESG Factor in Cross-Border M&A: Parent Choices, Market Reactions, and the Path to Better Outcomes

In this paper, I study the parent-subsidiary structure determination and market responses behind international mergers between firms with differentials in their Environmental, Social, and Governance (ESG) capacities. The cumulative abnormal returns in response to the M&A announcements between two firms with ESG differentials are higher for the deal with a greener acquirer, suggesting that the market holds an asymmetric belief on the potential impact of M&A on the future ESG performance. Consistent with the hypothesis that firms exploit this asymmetric belief and deliberately design the deal direction, both ESG disclosure practices and the actual emission levels impact the direction choice of an M&A deal. However, the ex-post ESG evaluation of the merged firm always fails the ex-ante expectation. Acquiring a relatively green firm does not proportionately improve the post-merger ESG rating or emission performance of the acquirer, and acquiring a brown firm does not, in fact, shock the host firm’s ESG evaluation as negatively as how much the market would demand compensation for.