Does Carbon Risk Affect The Adjustment Speed of Corporate Capital Structure? (Empirical Study on the Indonesian Stock Exchange)
Keywords:
Speed Adjustment, Carbon Risk, Capital Structure, Green Firm, Leverage, Climate Risk, Corporate Reputation
Abstract
This study examines how Indonesian listed companies adjust capital structure in response to carbon risk using Refinitiv Eikon data from 2015-2021. The Carbon Emissions Index is the independent variable, with Debt to Assets (DTA) and Equity to Assets (ETA) as dependent variables. A panel data model is employed, with a Fixed Effects Model for DTA and a Random Effects Model for ETA. Results indicate carbon emission risk positively moderates speed adjustment of capital structure which proxied by DTA and negatively moderates of the ETA, with adjusted R-squared values of 90.74% and 23.50%, respectively. However, carbon emission risk doesn't significantly affect overall capital structure. The DTA model better explains its influence of moderating effect of carbon emission on the speed of capital structure adjustment. Companies with higher carbon risk tend to have more debt and less equity, adjusting capital structure quickly in response to changes.
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References
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Akhtaruzzaman, M., Banerjee, A. K., Ghardallou, W., & Umar, Z. (2022). Is greenness an optimal hedge for sectoral stock indices?. Economic modelling, 117, 106030.
Al Rabab'a, E. A. F., Rashid, A., & Shams, S. (2023). Corporate carbon performance and cost of debt: Evidence from Asia-Pacific countries. International Review of Financial Analysis, 88, 102641.
Arian, A. G., & Sands, J. (2024). Do corporate carbon emissions affect risk and capital costs?. International Review of Economics & Finance, 93, 1363-1377.
Barry, Christopher B., Steven C. Mann, Vassil T. Mihov, and Mauricio Rodr´ıguez. (2008). “Corporate Debt Issuance and the Historical Level of Interest Rates.” Financial Management 37:3, 413–430.
Bauer, R., & Hann, D. (2010). Corporate Environmental Management and Credit Risk. Maastricht University European Centre for Corporate Engagement (ECCE). Working paper. https://doi.org/10.2139/ssrn.1660470
Bessler, Wolfgang, Drobetz, Rebekka Haller, and Iwan Meier. (2010). “The ZeroLeverage Phenomenon: International Evidence,” Working Paper, University of Giessen, University of Hamburg and HEC Montreal.
Bolton, P., Després, M., Pereira da Silva, L., Samama, F., & Svartzman, R. (2020). Green Swans’: central banks in the age of climate-related risks. Banque de France Bulletin, 229(8), 1-15.
Chava, S. (2014). Environmental Externalities and Cost of Capital. Management Science, 60(9), 2223-2247. https://doi.org/10.1287/mnsc.2013.1863
Chen, I. J., Hasan, I., Lin, C. Y., & Ngoc Vy, N. T. (2018). Do banks value borrowers’ environmental record? Evidence from financial contracts. Working paper. https://doi.org/10.2139/ssrn.3416019
Cook, Douglas O., and Tian Tang. (2010). “Macroeconomic Conditions and Capital Structure Adjustment Speed.” Journal of Corporate Finance 16:1, 73–87
Delis, M., Greiff, K., & Ongena, S. (2023). Being stranded with fossil fuel reserves? Climate Policy Risk and the Pricing of Bank loans. Working paper. Retrieved from: https://doi.org/10.2139/ssrn.3451335
Donadelli, Michael, Patrick Grüning, and Steffen Hitzemann. (2019). Understanding Macro and Asset Price Dynamics during the Climate Transition. Lieutuvus Bankas Discussion Paper Series 18: 1–62.
Dowell, G., Hart, S., & Yeung, B. (2000). Do corporate global environmental standards create or destroy market value?. Management science, 46(8), 1059-1074.
Drobetz, Wolfgang, and Gabrielle Wanzenried. (2006). “What Determines the Speed of Adjustment to the Target Capital Structure?” Applied Financial Economics 16:13, 941–958.
Engle, R. F., Giglio, S., Kelly, B., Lee, H., & Stroebel, J. (2020). Hedging climate change news. Review of Financial Studies, 33(3), 1184-1216.
Faulkender, Michael, and Mitchell A. Petersen. (2006). “Does the Source of Capital Affect Capital Structure?” Review of Financial Studies 19:1, 45–79.
Frank, Murray Z., and Vidhan K. Goyal. (2009). “Capital Structure Decisions: Which Factors Are Reliably Important?” Financial Management 38-:1, 1–37.
Gertler, Mark, and Simon Gilchrist. (1993). “The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence.” Scandinavian Journal of Economics 95:1, 43–64.
Graham, J., & Harvey, C. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60, 187–243.
Hackbarth, Dirk, Jianjun Miao, and Erwan Morellec. (2006). “Capital Structure, Credit Risk, and Macroeconomic Conditions.” Journal of Financial Economics 82:3, 519–550.
Hart, S. L., & Ahuja, G. (1996). Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business strategy and the Environment, 5(1), 30-37.
Henderson, Brian J., Narasimhan Jegadeesh, and Michael S. Weisbach. (2006). “World Markets for Raising New Capital.” Journal of Financial Economics 82:1, 63–101.
Hoffmann, Volker. H., and Timo Busch. (2008). Corporate carbon performance indicators: Carbon intensity, dependency, exposure, and risk. Journal of Industrial Ecology, 12: 505–520.
Huang, B., Punzi, M. T., & Wu, Y. (2021). Do banks price environmental transition risks? Evidence from a quasi-natural experiment in China. Journal of Corporate Finance, 69, 101983.
Jafino, B.A., Walsh, B.J., Rozenberg, J., & Hallegatte, S. (2020). Revised Estimates of the Impact of Climate Change on Extreme Poverty by 2030. Policy Research Working Paper, 9417
Jung, J., Herbohn, K., Clarkson, P. (2018). Carbon risk, carbon risk awareness and the cost of debt financing. J. Bus. Ethics, 150, 1151–1171.
Kelly, Scott, Jaclyn Z. Yeo, Andrew Coburn, Jennifer Copic, Doug Crawford-Brown, Aideen Foley, Eugen Neduv, Danny Ralph, and Farzad Saidi. (2015). Unhedgeable Risk: How Climate Change Sentiment Impacts Investors. Cambridge: University of Cambridge.
King, A. A., & Lenox, M. J. (2001). Does it really pay to be green? An empirical study of firm environmental and financial performance: An empirical study of firm environmental and financial performance. Journal of industrial ecology, 5(1), 105-116.
Kisgen, Darren J. (2009). “Do Firms Target Credit Ratings or Leverage Levels?” Journal of Financial and Quantitative Analysis 44:6, 1323–1344.
Kling, G., Volz, U., Murinde, V., & Ayas, S. (2021). The impact of climate vulnerability on firms’ cost of capital and access to finance. World Development, 137, 105131.
Krištofík, P., & Medzihorský, J. (2022). Capital structure of non-financial companies in EU countries – macroeconomic view. WSB Journal of Business and Finance, 56, 8 - 16.
Krueger, P., Sautner, Z., Starks, L.T. (2020). The importance of climate risks for institutional investors. Rev. Financial Studies 33, 1067–1111.
Labatt, Sonia, and Rodney R. White. (2007). Carbon Finance: The Financial Implications of Climate Change. Hoboken: Wiley.
Lemmon, Michael L., and Jaime F. Zender. (2010). “Debt Capacity and Tests of Capital Structure.” Journal of Financial and Quantitative Analysis, forthcoming.
Li, Y., & Zhang, Z. (2023). Corporate climate risk exposure and capital structure: Evidence from Chinese listed companies. Finance Research Letters, 51, 103488. https://doi.org/10.1016/j.frl.2022.103488
Li, Y., Eddie, I., Liu, J. (2014). Carbon emissions and the cost of capital: Australian evidence. Rev. Account. Finance 13, 400–420.
McGlade, C., & Ekins, P. (2015). The geographical distribution of fossil fuels unused when limiting global warming to 2 °C. Nature, 517(7533), 187-190.
Mercure, J. F., Pollitt, H., Viñuales, J. E., Edwards, N. R., Holden, P. B., Chewpreecha, U., ... & Salas, P. (2018). Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 8(7), 588-593.
Moore, William. (1986). “Asset Composition, Bankruptcy Costs and the Firm’s Choice of Capital Structure.” Quarterly Review of Economics and Business 26:1, 51–61.
Peyer, Urs, and Theo Vermaelen. 2008, “The Nature and Persistence of Buyback Anomalies.” Review of Financial Studies 22:4, 1693–1745.
Pizzutilo, F., Mariani, M., Caragnano, A., & Zito, M. (2020). Dealing with Carbon Risk and the Cost of Debt: Evidence from the European Market. International Journal of Financial Studies, 8(4), 61. https://doi.org/10.3390/ijfs8040061
Ramírez-Orellana, A., Martínez-Victoria, M., García-Amate, A., & Rojo-Ramírez, A. A. (2023). Is the corporate financial strategy in the oil and gas sector affected by ESG dimensions?. Resources Policy, 81, 103303.
Riedl, D. (2021). The magnitude of energy transition risk embedded in fossil fuel company valuations. Heliyon, 7(11).
Romilly, Peter. (2007). Business and climate change risk: A regional time series analysis. Journal of International Business Studies 38: 474–80.
Ross, Stephen A. (1985). “Debt and Taxes and Uncertainty.” Journal of Finance 40:3, 637–657.
Russo, M. V., & Fouts, P. A. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of management Journal, 40(3), 534-559.
Schneider, T. E. (2011). Is environmental performance a determinant of bond pricing? Evidence from the US pulp and paper and chemical industries. Contemporary Accounting Research, 28(5), 1537-1561. https://doi.org/10.1111/j.1911-3846.2010.01064.x
Scott, James H. (1977). “Bankruptcy, Secured Debt and Optimal Capital Structure.” Journal of Finance 32:1, 1–19
Seltzer, L., Starks, L. T., & Zhu, Q. (2022). Climate regulatory risks and corporate bonds. FRB of New York Staff Report No. 1014. https://doi.org/10.3386/w29994
Shu, H., Tan, W., & Wei, P. (2023). Carbon policy risk and corporate capital structure decision. International Review of Financial Analysis, 86, 1-15. https://doi.org/10.1016/j.irfa.2023.102523
Stern, N. (2006). What is the Economics of Climate Change? 7(2).
Taggart, Robert A. (1985). “Secular Patterns in the Financing of U.S. Corporations.” In Benjamin M. Friedman, ed., Corporate Capital Structures in the United States, 13–80. Chicago: University of Chicago Press.
Welch, Ivo. (2004). “Capital Structure and Stock Returns.” Journal of Political Economy 112:1, 106–131.
Wellington F, Sauer A. (2005). Framing Climate Risk in Portfolio Management. CERES–World Resource Institute: Washington, DC.
Published
2025-06-17
How to Cite
Muslimin. (2025). Does Carbon Risk Affect The Adjustment Speed of Corporate Capital Structure? (Empirical Study on the Indonesian Stock Exchange). International Journal of Economics, Business, and Entrepreneurship, 8(1), 33-49. https://doi.org/10.23960/ijebe.v8i1.302
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