Climate vulnerability and dynamic capital structure adjustment: Adaptation to Cop-21 and Covid-19 pandemic

Abstract

The study explores how climate vulnerability affects the speed of adjustment (SOA) at which corporate leverage toward its target ratio, while also analyzing the intermediary factors that shape this connection. Utilizing data from the LSEG Workspace database, the authors conducted research on 65584 observations from non-financial firms in Asia, from 2014 to 2023, with annual frequency. The authors employed a two-step partial adjustment model along with the Multiway Fixed Effects (MWFE) econometric method to estimate the variables. The research results indicate that climate vulnerability negatively influences firms’ SOA. The results suggest that when climate vulnerability rises by one standard deviation, the SOA declines by 1.98%. Additionally, the 2015 Paris Agreement (COP21) and the COVID-19 pandemic amplify this effect. Furthermore, these results contribute additional empirical evidence to key capital structure theories: Traditional and Modern Pecking Order Theory, Static and Dynamic Trade-Off Theory, Agency Theory, Stakeholder Theory, and Signaling Theory. The empirical findings align with the research objectives and are anticipated to provide corporate managers and stakeholders with valuable insights for making informed decisions regarding firms' leverage adjustments