Carbon Policy Risk and Corporate Capital Structure Decision

47 Pages Posted: 16 Sep 2022

See all articles by Ping Wei

Ping Wei

Central South University

Hao Shu

Central South University School of Business

Weiqiang Tan

The Education University of Hong Kong

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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

Suggested Citation

Wei, Ping and Shu, Hao and Tan, Weiqiang, Carbon Policy Risk and Corporate Capital Structure Decision. Available at SSRN: https://ssrn.com/abstract=4220652 or http://dx.doi.org/10.2139/ssrn.4220652

Ping Wei (Contact Author)

Central South University ( email )

Hao Shu

Central South University School of Business ( email )

Changsha, Hunan 410083
China

Weiqiang Tan

The Education University of Hong Kong ( email )

Tai Po
Hong Kong
Hong Kong

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