Stranded asset risk and corporate capital structure: Evidence from China’s low-carbon transition

The global transition toward a low-carbon economy intensifies financial pressures on fossil energy firms through the creation of stranded asset risk (SAR). This study examines the firm-level consequences of SAR on capital structure decisions in China, a key participant in the global energy transition. We develop a novel SAR index using a BERT-based model trained on corporate disclosures, and leverage it to analyze capital structure decisions. Empirical results show that SAR significantly reduces corporate leverage. This effect is particularly pronounced for non-state-owned, highly leveraged, and fossil-energy-dependent firms. Mechanism tests reveal a dual pathway. On the demand side, deleveraging is driven by firms’ cash shortfalls and their long-term financing needs. On the supply side, the effect is reinforced by tighter bank lending, wider bond spreads, and restricted credit access. Furthermore, strong ESG performance partially offsets the negative impact of SAR. These findings provide new evidence on how climate transition risks shape capital structure and underscore the role of ESG in mitigating their financial consequences.