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Climate Risk and Capital Structure

Author

Listed:
  • Edith Ginglinger

    (Université Paris-Dauphine, Université PSL, CNRS, DRM, 75016 Paris, France)

  • Quentin Moreau

    (Division of Environment and Sustainability, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

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.

Suggested Citation

  • Edith Ginglinger & Quentin Moreau, 2023. "Climate Risk and Capital Structure," Management Science, INFORMS, vol. 69(12), pages 7492-7516, December.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:12:p:7492-7516
    DOI: 10.1287/mnsc.2023.4952
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