Abstract

This work adds to climate finance research by studying stakeholder reactions to climate change exposure in the context of capital structure and product market interactions. We use a sample of 2,547 U.S. firms from 2004 to 2020, and find that climate change exposure intensifies stakeholder-driven costs of high leverage. The impact is stronger for firms headquartered in Democratic-leaning states, after the–Paris Agreement, in industries with more physical exposure, and among firms with more sensitive stakeholder responses. Overall, our results suggest that highly leveraged firms are vulnerable to climate change shocks and undergo stricter scrutiny from their stakeholders. Our study has several implications for climate finance research.