Climate Risk and Capital Structure
79 Pages Posted: 12 Feb 2019 Last revised: 6 Jun 2022
Date Written: January 15, 2019
We use firm-level data that measure forward-looking physical climate risk to examine the impact of climate risk on capital structure. We find that greater physical climate risk leads to lower leverage in the post-2015 period, i.e., after the Paris Agreement and the first step of standardization of disclosure of climate risk information. 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 (bankers and bondholders increase the spreads when lending to firms with the greatest risk). Our results are consistent with the hypothesis that physical climate risk affects leverage via larger expected distress costs and higher operating costs.
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