Impact of the corporate response to climate risk on financial leverage and systematic risk

ABSTRACT

This study examines how firms’ responses to climate risk affect the financial leverage through an impact on the asset beta. Considering the 2015 Paris Agreement about greenhouse gas reduction as a natural experiment on Japanese manufacturing firms, we observe that the asset beta increased and financial leverage decreased for high emission firms after the agreement was signed. Further, a significant decline was observed for the leverage of high emission firms experiencing a sharp rise in the asset beta.

KEYWORDS:

• Climate risk
• financial leverage
• systematic risk
• Japan

JEL CLASSIFICATION:

• G30
• G32
• Q56

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Operating leverage captures operations’ cost structure while financial leverage captures financing structure.

² https://www.env.go.jp/earth/ondanka/ghg-mrv/emissions/results-h25.html (as of November 15, 2021).