Climate change exposure and precautionary financial policy: Cross-country evidence

We examine how firm-level exposure to climate change affects corporate financial policies using a large international sample of publicly listed firms from 34 countries. Employing a forward-looking, disclosure-based measure of climate change exposure, we find that firms with greater climate exposure hold more cash, use less leverage, and pay lower dividends. These effects are economically significant, robust across various specifications, and have become stronger following the Paris Agreement, consistent with increased regulatory and transition risk. We identify three channels through which climate exposure influences financial policy. Climate-exposed firms exhibit higher cash-flow volatility, face tighter external financing conditions, and reduce irreversible investment. Consistent with these mechanisms, the effects are amplified for firms with higher operating volatility, greater reliance on bank financing, and more irreversible capital structures. Cross-country analyses reveal that the impact of climate exposure is stronger in countries with more developed financial markets, stricter climate policies, and higher institutional quality. Overall, our results demonstrate that climate change is a persistent source of risk that induces precautionary adjustments across multiple corporate financial margins.