Climate Risk and Capital Structure
44 Pages Posted: 12 Feb 2019
Date Written: January 15, 2019
We use new data measuring 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 and several fixed effects. Our evidence shows that the reduction in debt related to climate risk is shared between a demand effect (the firm’s optimal leverage decreases) and a supply effect (lenders, especially bankers, reduce their lending to companies with the greatest risk).
Keywords: Capital Structure, Leverage, Credit Rating, Climate Risk, Natural Disasters
JEL Classification: G18, G2, G32, Q54
Suggested Citation: Suggested Citation