Kyoto Protocol and capital structure: a comparative study of developed and developing countries

This study examines the impact of the ratification of the Kyoto Protocol on the capital structure of nonfinancial firms in 45 countries from 2002 to 2007. Results show that in general, the Protocol ratification has a negative impact on the leverage of firms. Such negative impact is apparent in developed than in developing countries. Furthermore, this negative impact is reinforced by a market-based, as opposed to bank-based, financial system. Lastly, results suggest that the Protocol ratification has reduced agency costs for firms in developed as opposed to developing countries. Results provide policy implications. In general, firms in ratifying countries should reduce leverage in response to stricter climate-related regulations as they undergo transition toward becoming environment friendly. Such leverage reduction should be more pronounced in developed than in developing countries. Firms in ratifying countries with market-based financial system should reduce leverage more than those in ratifying countries with bank-based financial system should. Finally, results suggest that it is beneficial for developed countries to commit to becoming environmentally liable by joining the global effort to combat climate change because the Protocol ratification appears to mitigate agency problems for firms in developed countries.