Carbon Finance and Dynamic Capital Structure Adjustment

Abstract

Using data of China’s A-share-listed companies between 2014 and 2024, we investigate the effect of carbon finance on the speed of dynamic capital structure adjustment and the degree of deviation of enterprises. We find that carbon finance has a significantly positive effect on the speed of adjusting the capital structure and that carbon finance is consistent in keeping firms in line with their target leverage ratio, according to a number of robustness tests. Notably, cross-sectional analyses show that this effect is more pronounced among firms with lower green innovation outputs and greater indebtedness. Further research indicates that the underlying mechanism driving this relationship lies in alleviating financing constraints and reducing financing costs. By bridging the gap between market-oriented environmental regulations and corporate financial policies, our study provides policymakers with evidence to improve carbon finance mechanisms and gives managers a foundation for transforming carbon finance into a strategic tool for proactively optimizing capital structure.