Carbon Policy Risk and Corporate Capital Structure Decision

62 Pages Posted: 9 Jul 2022 Last revised: 18 Sep 2022

See all articles by Hao Shu

Hao Shu

Central South University School of Business

Weiqiang Tan

Education University of Hong Kong; The Education University of Hong Kong

Ping Wei

Central South University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 20, 2022

Abstract

This study examines the relationship between carbon policy risk and corporate capital structure in China. Using a sample of A-share listed firms from 1997 to 2018, we find that carbon policy risk reduces firms’ financial leverage. The result is robust to the introduction of difference-in-differences tests, instrumental variable regression, and a placebo test used to address endogeneity, as well as to other tests of alternative measures. This negative relationship is more pronounced for non-state-owned enterprises, firms with low institutional investor ownership, firms with poor corporate social responsibility performance, firms belonging to competitive or carbon-sensitive industries, and firms located in provincial cities. Financing constraints, bankruptcy risk, and government power are potential mechanisms underlying this observation. Further analysis reveals that carbon policy risk accelerates firms’ adjusting to the target capital structure, especially those with the above-target capital structure. Our findings provide practical suggestions through which firms can address carbon policy risk and provide guidance to governments and regulators for the further implementation of environmental policies.

Keywords: Climate change; Carbon policy risk; Capital structure; Leverage adjustment; China

JEL Classification: G32; Q51; Q54

Suggested Citation

Shu, Hao and Tan, Weiqiang and Tan, Weiqiang and Wei, Ping, Carbon Policy Risk and Corporate Capital Structure Decision (June 20, 2022). Available at SSRN: https://ssrn.com/abstract=4141181 or http://dx.doi.org/10.2139/ssrn.4141181

Hao Shu

Central South University School of Business ( email )

Changsha, Hunan 410083
China

Weiqiang Tan (Contact Author)

Education University of Hong Kong ( email )

Dept of Social Sciences
Education University of Hong Kong
Tai Po, NT 11111
Hong Kong

The Education University of Hong Kong ( email )

Tai Po
Hong Kong
Hong Kong

Ping Wei

Central South University - School of Business

Changsha, Hunan 410083
China

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