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Carbon Risk and Corporate Capital Structure: The State of the Art

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  • Oscar Domenichelli

Abstract

In this paper the relationship between carbon risk and corporate capital structure is examined. Recent literature highlights that heavy carbon-emitting firms need to adjust their level of indebtedness to reach their optimal financial leverage. Specifically, the amount of debt raised by high carbon-emitting businesses is lower than that of their low carbon-emitting counterparts. This can be explained by using the trade-off theory, according to which heavy carbon-emitting firms undergo both increasing financial distress costs and decreasing tax benefits of debt, causing them to employ a lower level of financial leverage relative to light carbon-emitting firms.

Suggested Citation

  • Oscar Domenichelli, 2023. "Carbon Risk and Corporate Capital Structure: The State of the Art," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 15(8), pages 1-66, August.
    • Handle: RePEc:ibn:ijefaa:v:15:y:2023:i:8:p:66
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    References listed on IDEAS

    as
    1. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    2. Karpoff, Jonathan M & Lott, John R, Jr & Wehrly, Eric W, 2005. "The Reputational Penalties for Environmental Violations: Empirical Evidence," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 653-675, October.
    3. Balachandran, Balasingham & Nguyen, Justin Hung, 2018. "Does carbon risk matter in firm dividend policy? Evidence from a quasi-natural experiment in an imputation environment," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 249-267.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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