Climate Policy Risk and Corporate Financial Decisions: Evidence from the NOx Budget Trading Program

Viet A. Dang, Ning Gao, Tiancheng Yu

Research output: Contribution to journalArticlepeer-review


We find that manufacturing firms adopt more conservative capital structures in response to the NOx Budget Trading Program (NBP) of 2004, a regional cap-and-trade program aimed at mitigating the NOx emissions of power plants in 11 midwestern and southeastern states in the United States. Our further analysis demonstrates that, because the NBP induces an electricity price shock, it affects manufacturers’ financial decisions by raising their operating leverage and distress risk. We also find that firms respond to the NBP’s adoption heterogeneously: they adjust their financial leverage more dramatically when facing greater electricity intensity, financial distress threats, or competitive pressure. In addition, firms adapt not only capital structure but also other financial policies in response to the regulation. Overall, our study shows that climate policy risk constitutes an essential consideration in firm financial decisions. It also highlights potential unintended consequences of policy responses to climate change for the corporate sector.
Original languageEnglish
Publication statusAccepted/In press - 29 Mar 2022


  • policy risk
  • climate change
  • emission mitigation
  • cap-and-trade programs
  • capital structure
  • financial decisions
  • input costs
  • financial distress
  • operating leverage


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