Climate Risk and Capital Structure

Edith Ginglinger and Quentin Moreau ()
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Quentin Moreau: Division of Environment and Sustainability, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

Management Science, 2023, vol. 69, issue 12, 7492-7516

Abstract: 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 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: physical climate risk; climate change exposure; Paris Agreement; capital structure; leverage; credit rating; ESG (search for similar items in EconPapers)
Date: 2023
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http://dx.doi.org/10.1287/mnsc.2023.4952 (application/pdf)

Related works:
Working Paper: Climate risk and capital structure (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:12:p:7492-7516

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