Climate Adaptation Risk and Capital Structure: Evidence From State Climate Adaptation Plans

ABSTRACT Taking the staggered implementation of state climate adaptation plans (SCAPs) as a quasi‐natural experiment, we find that firms headquartered in states that finalize SCAPs increase their financial leverage significantly more in the postadoption period relative to firms located in states without SCAPs. This result is driven by firms facing greater physical climate risk and by firms with more sensitivity to climate policy uncertainty. Further, we show that the leverage increase is value‐enhancing and that SCAPs reduce corporate business risk. The results highlight the net benefits of state climate action and the role of local governments in the interplay between business risk and firm decision, with implications both for the business world and policymakers.