Sea-level rise and firms' financial structure decisions

Abstract

We study how environmental risks induced by the potential inundation associated with sea-level rise affects firms' financial structure decisions. We find that firm leverage decreases with inundation risks associated with sea-level rise. To establish causality, we consider firms' relocation of their headquarters, a propensity score matching estimator, and a difference-in-differences estimator around the release of the documentary “An Inconvenient Truth” and find that our results are robust. The negative relation between inundation risks due to sea-level rise and financial leverage is more pronounced for firms with more geographically concentrated operations, firms with more close rivals, and firms that are non-investment grade. SLR risk-affected firms shift more towards equity and away from debt in their capital raising efforts and have a relatively higher weight of their leverage in short-term debt. Our findings highlight firms' proactive adjustment and adaptation to long-term environmental risks.