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Does the EU-ETS affect the firm's capital structure? Evidence from French manufacturing firms

Author

Listed:
  • Pascale Combes Motel

    (Laboratoire d'Economie d'Orléans, University Clermont Auvergne)

  • Aimé Okoko

    (Laboratoire d'Economie d'Orléans, University Clermont Auvergne)

  • Sonia Schwartz

    (Laboratoire d'Economie d'Orléans, University Clermont Auvergne)

Abstract

This study investigates the impact of the European Union Emissions Trading System (EU-ETS) on the capital structure, namely the debt ratio, of French firms from 2007 to 2018. To do this, we construct an original database linking French firms subject to the ETS to their financial variables. Using a matching method, we show that firms participating in the ETS have a higher debt ratio than non-participating ones. To consider the effect of the initial allocation of allowances, we divide our sample of treated firms according to their initial allocation quartile. We find that firms with the lowest initial allowances have the highest debt ratio. Furthermore, the ETS's effect on firms' capital structure is observed during Phase 2 (2008-2012) as opposed to Phase 3 (2013-2020) and concerns firms operating on domestic markets. The effect also differs according to the sectors selected. Our results suggest that, faced with the ETS, firms anticipated the future tightening of environmental constraints. Firms that received the fewest free-of-charge allowances complied by investing in pollution-reduction technologies relying on debt financing. Environmental policy variables, therefore, have an impact on the financial structure of firms.

Suggested Citation

  • Pascale Combes Motel & Aimé Okoko & Sonia Schwartz, 2024. "Does the EU-ETS affect the firm's capital structure? Evidence from French manufacturing firms," Working Papers 2024.05, FAERE - French Association of Environmental and Resource Economists.
    • Handle: RePEc:fae:wpaper:2024.05
    as

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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