ABSTRACT
Climate risk should drive the design of financial contracts: when contracting parties anticipate potential climate contingencies affecting asset values, they might want more complete contracts to reduce the uncertainty of future contracting outcomes. Exploiting a novel sample of corporate real estate lease contracts combined with quasi-experimental hurricane incidents, this paper demonstrates how climate risk exposure enhances contract completeness. The key finding is that a recent hurricane experience at a tenant-side corporate headquarters leads to a 20% increase in the number of clauses related to climate-related contingencies, such as insurance or Force Majeure, in their contracts for subsequent years. Intriguingly, such experiences catalyze a 5% increase in the addition of clauses on topics beyond climate-related contingencies, thus enriching the contract’s overall completeness. The findings are consistent across different measures of contract completeness and various econometric specifications.
Takahashi, Masashi, Climate Risk and Contract Completeness: Evidence from Corporate Real Estate Leases (January 8, 2024).
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