Critical Raw Materials, Production Networks, and Pricing
Measuring Critical Raw Material Dependence
Firms can depend on critical raw materials they do not purchase directly because these materials are embodied in intermediate inputs several stages upstream. We develop a measure of firms’ structural dependence on critical raw materials. Theoretically, we show that structural dependence can be represented by the sum across supply-chain paths of products of stage-level cost shares. The same statistic measures marginal-cost sensitivity to a material price shock and, under benchmark rationing, output sensitivity to a physical shortage. Empirically, we build material-specific production networks from engineering and trade evidence and calibrate the implied cost shares using physical input requirements, process yields, product prices, and sector markups. We map product exposure to firms using industry and segment information. The measure provides a framework for studying how material-specific disruptions affect firms along the value chain and whether structural dependence is reflected in equity prices.
International Trade in Brown Assets
Resistance and Arbitrage: International Trade in Brown Loans [Draft]
Yihong Xia Best Paper Award, CICF 2025
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 risk-taking 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.
International ownership of brown shares and economic development [Draft]
Using global share-ownership data for 2002–2021, we study how carbon-intensive firms come to be owned across countries at different levels of economic development and how this affects their environmental outcomes. Richer countries tilt away from carbon-intensive firms more than poorer countries do. Because shares must be held, market clearing leaves more of these firms in poorer-country hands. This poorer-country ownership predicts higher subsequent emissions and ESG incidents. We show that rich-country fossil-fuel divestment pushes firms toward such ownership, followed by worse environmental outcomes. Climate-motivated exit, by reallocating these firms toward less environmentally inclined owners, can work against the goal it serves.
ESG and Corporate Control
When ESG information drives control: evidence from M&A deals
We study how ESG information affects the allocation of corporate control in mergers and acquisitions. Conditional on deal occurrence, firms with an ESG information advantage are more likely to acquire control, consistent with higher expected synergy. Environmental comparative advantage is a major determinant of M&A direction, beyond the governance gains emphasized in existing research. The effect is stronger in countries with higher institutional quality and richer information environments, and when markets have recently rewarded ESG-informed acquirers. Event-study results show asymmetric market perceptions of ESG information for acquirers and targets. ESG-informed control may also reduce within-deal uncertainty, as stock financing is less likely and less intensive in such deals. These findings suggest that used asset trade can reallocate control from less to more environmentally capable firms, facilitating the green transition.