Impact of the Corporate Response to Climate Risk on Financial Leverage and Systematic Risk

This study examines the impact of corporate environmental efforts on financial leverage and systematic risk. Specifically, this study uses the 20th session of the Conference of the Parties of the United Nations Framework Convention on Climate Change (COP 20) in 2014 as a natural experiment to conduct a difference-in-differences analysis for Japanese firms. After COP 20, Japanese firms in high greenhouse gas emission industries experience a statistically significant decline in financial leverage and a significant increase in stocks’ systematic risk. The results suggest that climate risk regulations increase fixed operating costs for targeted firms rather than enhance innovations for efficient greenhouse gas reduction