Climate Change Uncertainty and Supply Chain Financing

Posted: 10 May 2021 Last revised: 20 Dec 2021

See all articles by Zhangfan Cao

Zhangfan Cao

Zhejiang Gongshang University

Ting Dong

Stockholm School of Economics

Edward Lee

University of Manchester - Alliance Manchester Business School

Date Written: May 7, 2021

Abstract

This paper investigates the impact of climate change uncertainty on supply chain financing. Consistent with the view that suppliers become more conservative in response to climate change, we find that firms significantly curtail trade credit during periods of high climate change uncertainty. By exploiting two exogenous regulatory interventions in the US, we conduct two triple-differences (DiDiD) analyses and document that the negative impact of climate risk on trade credit is less pronounced and partially mitigated by the staggered adoptions of state-level Climate Change Adaptation Plans (CCAP) which systematically bolster states’ effort in mitigating climate change and the Interstate Banking and Branching Efficiency Act (IBBEA) which significantly increase credit supply. In our cross-sectional tests, we find that impact of climate change risk varies considerably with firm characteristics such as firms’ vulnerability to climate change, degree of pollution on the environment, and asset redeploybility. To further establish casual inference, we also conduct a series of endogeneity tests including a natural experiment using the Katrina Hurricane and an instrumental variable (IV) approach. Our finding is also robust to a battery of sensitivity tests, including propensity-score-matching (PSM) analyses and the alternative measures of key variables. Collectively, our findings highlight that climate change, as a new yet increasingly prominent risk factor, can undermine the financial resilience of the supply chain, which provides timely managerial and policy implications on how to cope with climate change as a global challenge in the context of the current global supply chain crisis and the COVID-19 pandemic.

Keywords: Climate Change, Climate Risk, Natural Disasters, Trade Credit, Supply Chain Financing

JEL Classification: G32, F64, D81, Q51

Suggested Citation

Cao, Zhangfan and Dong, Ting and Lee, Edward, Climate Change Uncertainty and Supply Chain Financing (May 7, 2021). Available at SSRN: https://ssrn.com/abstract=3841335

Zhangfan Cao (Contact Author)

Zhejiang Gongshang University ( email )

School of Accounting
Zhejiang
China

Ting Dong

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

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