Carbon Risk and Corporate Capital Structure

Nguyen, Justin Hung; Phan, Hieu V.

doi:10.2139/ssrn.3074035

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Carbon Risk and Corporate Capital Structure

Journal of Corporate Finance, Forthcoming

72 Pages Posted: 21 Nov 2017 Last revised: 20 Aug 2020

See all articles by Justin Hung Nguyen

Justin Hung Nguyen

Edith Cowan University - School of Business & Law

Hieu V. Phan

University of Massachusetts Lowell - The Robert J. Manning School of Business

Date Written: August 18, 2018

Abstract

This research exploits Australia’s ratification of the Kyoto Protocol, which mandates the country to reduce carbon emissions, thereby exposing Australian firms to increased carbon risk, as a quasi-natural experiment to examine the causal effect of carbon risk on firm capital structure. We find that the Kyoto Protocol ratification leads to a decrease in financial leverage of heavy carbon emitting firms and such a decrease is more pronounced for financially constrained firms. Further analysis indicates that increased carbon risk leads to higher financial distress risk, which motivates firms to decrease financial leverage.

Keywords: Carbon risk; Capital structure; Financial distress; Financial constraint

JEL Classification: G32, Q51, Q58

Suggested Citation: Suggested Citation

Nguyen, Justin Hung and Phan, Hieu V., Carbon Risk and Corporate Capital Structure (August 18, 2018). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3074035 or http://dx.doi.org/10.2139/ssrn.3074035