Firms’ borrowing costs and neighbors’ flood risk

This study examines whether Italian firms exposed to physical climate risks incur additional borrowing costs due to spatial spillovers. Using a sample of 419,040 firm-year observations from 2016 to 2019, we find a positive relationship between a firm’s cost of debt and its neighborhood’s average exposure to climate risk. According to our findings, the costs associated with neighborhood climate risk are as relevant as those associated with a firm’s direct risk, with small businesses being the only ones affected by spillover effects. These results may be explained by small enterprises’ lack of financial diversification, poor bargaining power, and strong reliance on credit from financial intermediaries.