Journal
JOURNAL OF CORPORATE FINANCE
Volume 64, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.jcorpfin.2020.101713
Keywords
Carbon risk; Capital structure; Financial distress; Financial constraint
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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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