Climate change exposure and dividend policy: evidence from textual analysis

Abstract

Purpose: Taking advantage of distinctive text-based measures of climate policy uncertainty and firm-specific exposure to climate change, this study aims to examine the impact of firm-specific vulnerability on dividend policy. Design/methodology/approach: To mitigate endogeneity, the authors apply an instrumental-variable analysis based on climate policy uncertainty as well as use additional analysis using propensity score matching and entropy balancing. Findings: The authors show that an increase in climate policy uncertainty exacerbates firm-specific exposure considerably. Exploiting climate policy uncertainty to generate exogenous variation in firm-specific exposure, the authors demonstrate that companies more susceptible to climate change are significantly less likely to pay dividends and those that do pay dividends pay significantly smaller dividends. For instance, a rise in firm-specific exposure by one standard deviation weakens the propensity to pay dividends by 5.11%. Climate policy uncertainty originates at the national level, beyond the control of individual firms and is thus plausibly exogenous, making endogeneity less likely. Originality/value: To the best of the authors’ knowledge, this study is the first attempt in the literature to investigate the effect of firm-specific exposure on dividend policy using a rigorous empirical framework that is less vulnerable to endogeneity and is more likely to show a causal influence, rather than a mere correlation.