Roll with the punches: Climate change regulation and short-term financing

Abstract

This paper employs China's regional Emissions Trading System (ETS) pilots as a quasi-natural experiment to examine the impact of climate change regulations on corporate short-term debt financing decisions. The empirical analysis indicates that the introduction of the ETS results in a 30.4 % reduction in short-term financial leverage among regulated firms compared to their non-regulated counterparts, while keeping unchanged in their long-term debt. This effect is particularly pronounced for firms headquartered in regions with lower free quota rates and those with less government ownership. The mechanism analysis suggests that the regional ETS has increased firms' environmental compliance costs and financial distress risks, prompting a reduction in short-term debt financing. These findings substantiate the argument that the ETS has inadvertently impaired firms' access to short-term credit by elevating their distress risk. This research underscores the unintended consequences of climate policy on the maturity structure of corporate debt.