Climate Risk and Capital Structure

Climate Risk and Capital Structure

Edith Ginglinger, Quentin Moreau

Series number :

Serial Number: 
737/2021

Date posted :

March 10 2021

Last revised :

May 30 2023
SSRN Share

Keywords

  • climate change • 
  • Paris Agreement • 
  • capital structure • 
  • leverage • 
  • Natural disasters • 
  • credit rating • 
  • cost of debt • 
  • CSR

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.

Published in

Published in: 
Description: 
Forthcoming, Management Science

Authors

Real name:
Quentin Moreau