The Impact of Decarbonization on Financial Leverage – Evidence from European Firms
Abstract
I use data on firm-level carbon emissions to measure corporate decarbonization and examine its impact on financial leverage. For a sample of 4,452 firm-year observations, including 808 firms between 2011 and 2020, I find that decarbonization is negatively related to financial leverage. The effect is more pronounced in the years following the Paris Climate Agreement in 2015. Examining the channel through which leverage ratios decrease, I find that decarbonization is positively related to equity issuance but not to debt retirement. Moreover, the decrease in leverage is associated with increased spending on research and development, especially for decarbonizing firms. The results indicate that firms tend to meet the costs of decarbonization with equity, which leads to a decrease in leverage.