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Drought risk and capital structure dynamics

Drought risk and capital structure dynamics Using a fractional dependent estimator (DPF) approach and 130,511 US firm‐year observations over the period 1970–2015, this paper examines the impact of drought risk on firms’ capital structure and the adjustment speed of capital structure (SOA). We demonstrate that drought risk has negative effects on both leverage and the speed of leverage adjustment. We also find evidence of the spillover effect of drought on the adjustment speed of capital structure among firms operating in non‐water dependent industries. The effects are stronger for firms with no credit ratings. Interestingly, firms with strong cash flows can adjust their capital structure more quickly. Collectively, our findings suggest that climate risk in the form of drought not only affects firm risk but also the capital structure of firms, thereby highlighting that externality from climatic conditions are relevant to business operations and corporate polices. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting & Finance Wiley

Drought risk and capital structure dynamics

Nguyen, Thao; Bai, Min; Hou, Greg; Truong, Cameron
Accounting & Finance , Volume Early View – Dec 3, 2021
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Publisher
Wiley
Copyright
Accounting and Finance © 2021 Accounting and Finance Association of Australia and New Zealand
ISSN
0810-5391
eISSN
1467-629X
DOI
10.1111/acfi.12891
Publisher site
See Article on Publisher Site

Abstract

Using a fractional dependent estimator (DPF) approach and 130,511 US firm‐year observations over the period 1970–2015, this paper examines the impact of drought risk on firms’ capital structure and the adjustment speed of capital structure (SOA). We demonstrate that drought risk has negative effects on both leverage and the speed of leverage adjustment. We also find evidence of the spillover effect of drought on the adjustment speed of capital structure among firms operating in non‐water dependent industries. The effects are stronger for firms with no credit ratings. Interestingly, firms with strong cash flows can adjust their capital structure more quickly. Collectively, our findings suggest that climate risk in the form of drought not only affects firm risk but also the capital structure of firms, thereby highlighting that externality from climatic conditions are relevant to business operations and corporate polices.

Journal

Accounting & Finance – Wiley

Published: Dec 3, 2021

Keywords: Adjustment costs; Climate change; Drought risk; Leverage; Speed of adjustment; Target capital structure

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