Carbon risk and corporate capital structure |
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Institution: | 1. College of Finance and Statistics, Hunan University, Changsha, Hunan 410006, China;2. Digital Economy Academy, Yango University, Fuzhou, Fujian 350015, China |
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Abstract: | This research exploits Australia's ratification of the Kyoto Protocol, which mandates the country to reduce carbon emissions, thereby exposing Australian firms to increased carbon risk, as a quasi-natural experiment to examine the causal effect of carbon risk on firm capital structure. We find that the Kyoto Protocol ratification leads to a decrease in financial leverage of heavy carbon emitting firms and such a decrease is more pronounced for financially constrained firms. Further analysis indicates that increased carbon risk leads to higher financial distress risk, which motivates firms to decrease financial leverage. |
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