Climate transition and the speed of leverage adjustment

Abstract

This study examines the entanglement between firms’ climate change exposure and corporate capital structure decisions. In a sample of publicly listed firms on the S&P 1200 Global from 2010 to 2022, the results indicate that companies at the forefront of the transition to a low-carbon economy experience a higher speed of leverage adjustment. Notably, the analysis reveals an asymmetric speed of leverage adjustment when comparing the effect of climate change exposure on over-leveraged and under-leveraged firms. The results underscore the significance of equity capital in fostering the transition to a low-carbon economy and the pivotal role of regulatory bodies in facilitating corporate access to finance climate-friendly investments.