Corporate leverage and leverage speed of adjustment: Does environmental policy stringency matter?

This study examines the effects of environmental policy stringency on corporate leverage and speed of adjustment across 39 countries from 1994 to 2020. The primary empirical findings illustrate that environmental policy stringency is negatively related to leverage and leverage adjustment speed. Such effects are prominent for firms with financial constraints, in countries with significant climate-risk exposure and corruption, or in Asia. Based on our main findings, when policymakers implement environmental policies, corporate decisions regarding leverage and debt financing should be taken into account, as these policies can discourage firms from increasing leverage and slow down the speed of adjustment toward optimal leverage.