Greenhouse gas emissions, corporate capital structure, and financial decisions: US state-level evidence

For the first time, this study quantifies the long-term effects of greenhouse gas [GHG] emissions on corporate capital structures. Using US state-level data, I find that GHG exposure has adverse consequences for the capital structure, with a persistently predicted decrease in corporate financial leverage. The treatment effects of GHG exposure are exceptionally robust, even when we control for a battery of endogenous and exogenous drivers. Firms that are treated experience chronic economic downgrades and liquidity shortfalls. Shrinking cash reserves induce firms to decrease corporate payouts for both dividends and share repurchases. Trade credit serves as an alternative source of liquidity; however, it poses challenges for firms with higher biodiversity risks that are prone to natural disasters, particularly since the implementation of the Paris Agreement. With increasing financial distress, such long-term GHG exposure consequently renders firms financially constrained, forcing them to rely on external finances with a constant decrease in corporate leverage. As climate change brings both opportunities and risks to firms, our study provides ground-breaking evidence for major corporate finance literature streams. With multiple novelties, our hypotheses tested are empirically robust, which is fundamentally critical to future studies.