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Climate Policy Risk and Corporate Financial Decisions: Evidence from the NO x Budget Trading Program

Author

Listed:
  • Viet Anh Dang

    (Alliance Manchester Business School, University of Manchester, Manchester, Greater Manchester, M15 6PB, United Kingdom of Great Britain and Northern Ireland)

  • Ning Gao

    (Alliance Manchester Business School, University of Manchester, Manchester, Greater Manchester, M15 6PB, United Kingdom of Great Britain and Northern Ireland)

  • Tiancheng Yu

    (University of Exeter Business School, University of Exeter, Exeter, EX4 4PU, United Kingdom of Great Britain and Northern Ireland)

Abstract

We find that manufacturing firms adopt more conservative capital structures in response to the Nitrogen Oxides (NO x ) Budget Trading Program (NBP) of 2004, a regional cap-and-trade program aimed at mitigating the NO x emissions of power plants in 11 midwestern and southeastern states in the United States. Our further analysis demonstrates that, because the NBP induces an electricity price shock, it affects manufacturers’ financial decisions by raising their operating leverage and distress risk. We also find that firms respond to the NBP’s adoption heterogeneously: they adjust their financial leverage more dramatically when facing greater electricity intensity, financial distress threats, or competitive pressure. In addition, firms adapt not only capital structure, but also other financial policies in response to the regulation. Overall, our study shows that climate policy risk constitutes an essential consideration in firm financial decisions. It also highlights potential unintended consequences of policy responses to climate change for the corporate sector.

Suggested Citation

  • Viet Anh Dang & Ning Gao & Tiancheng Yu, 2023. "Climate Policy Risk and Corporate Financial Decisions: Evidence from the NO x Budget Trading Program," Management Science, INFORMS, vol. 69(12), pages 7517-7539, December.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:12:p:7517-7539
    DOI: 10.1287/mnsc.2022.4617
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