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Sea‐level rise and firms' financial structure decisions

Author

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  • Mengchao Ai
  • John (Jianqiu) Bai
  • Chen Shen

Abstract

We study how environmental risks induced by the potential inundation associated with sea‐level rise affects firms' financial structure decisions. We find that firm leverage decreases with inundation risks associated with sea‐level rise. To establish causality, we consider firms' relocation of their headquarters, a propensity score matching estimator, and a difference‐in‐differences estimator around the release of the documentary “An Inconvenient Truth” and find that our results are robust. The negative relation between inundation risks due to sea‐level rise and financial leverage is more pronounced for firms with more geographically concentrated operations, firms with more close rivals, and firms that are non‐investment grade. SLR risk‐affected firms shift more towards equity and away from debt in their capital raising efforts and have a relatively higher weight of their leverage in short‐term debt. Our findings highlight firms' proactive adjustment and adaptation to long‐term environmental risks.

Suggested Citation

  • Mengchao Ai & John (Jianqiu) Bai & Chen Shen, 2024. "Sea‐level rise and firms' financial structure decisions," Review of Financial Economics, John Wiley & Sons, vol. 42(4), pages 442-466, October.
    • Handle: RePEc:wly:revfec:v:42:y:2024:i:4:p:442-466
    DOI: 10.1002/rfe.1201
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