Does climate risk exposure affect corporate leverage adjustment speed? International evidence

To examine the role of climate risk exposure in corporate capital structure decisions, we use a large sample of firms across 35 countries from 2001 to 2021 and show a significantly positive association between firms' climate risk exposure and speed of leverage adjustment based on a two-step partial leverage adjustment model. A one-standard-deviation increase in climate risk exposure increases firms' SOA by 5.59%. A plausible explanation is that climate risk exposure mitigates agency conflicts and improves information efficiency. The positive relationship is stronger in firms from countries with better climate governance, lower bank financing support, and higher policy quality. Overall, our study demonstrates the critical role of climate risk in capital structure decisions in the global context.