Climate Risk and Capital Structure
64 Pages Posted: 12 Feb 2019 Last revised: 9 Mar 2021
Date Written: January 15, 2019
We use new data that measure forward-looking physical climate risk at the firm level to examine the impact of climate risk on capital structure. We find that greater climate risk leads to lower leverage in the post-2015 period, i.e., after the Paris Agreement. Our results hold after controlling for firm characteristics known to determine leverage, including credit ratings. Our evidence shows that the reduction in leverage related to climate risk is shared between a demand effect (the firm’s optimal leverage decreases) and a supply effect (lenders increase the spreads when lending to firms with the greatest risk).
Keywords: Climate change, Paris Agreement, capital structure, leverage, natural disasters, credit rating, cost of debt, CSR
JEL Classification: G18, G2, G32, Q54
Suggested Citation: Suggested Citation