ESSAYS ON HOW FIRM-LEVEL CLIMATE CHANGE EXPOSURE, FIRM-LEVEL POLITICAL RISK AND DEBT FINANCING AFFECT CORPORATE DECISIONS

Abstract

My dissertation investigates the influence of firm-level climate change risk, political risk and debt finance on corporate decisions. It contains three chapters. Chapter 1 investigates how climate change exposure affects extensive and intensive margins of corporate R&D investment. Using firm-level climate change exposure data, the empirical findings indicate that climate change exposure positively and significantly affects both intensive and extensive margin of corporate R&D investment. I show that carbon intensive firms significantly increase their extensive and intensive margins of corporate R&D in response to an increase in climate changes. As a plausible exogenous shock, I find that after the Paris Agreement and Renewable Portfolio standards adoption, firms increased their corporate intensive margins of R&D. The results are robust with other measures of climate change exposure and with the inclusion of industry and macroeconomic factors. Also, I find that firms in carbon intensive industries engage more in R&D than firms in green industries. Chapter 2 examines the effects of political risk on firm labor decisions, revealing how firm-level political risk impact wages, employment growth, and labor productivity among U.S. Firms. This study reveals how firm-level political risk affects firm labor decisions. I empirically analyze how firms' labor decisions respond to firm political risk using a sample of 3,131 U.S. firms from 2002 to 2022. My analysis shows that a one standard deviation increase in firm-level political risk is associated with a 9.22 percentage point wage increase. Political risk affects wages significantly when interacted with competition, capital intensity and labor share. Moreover, my findings are consistent using various measures of firm-level political risk and wages. In addition, one standard deviation increase in firm political risk is associated with 8.94 and 30.48 percentage point decreases in employment growth and labor productivity, respectively. My study reveals that the reduction in employment growth and labor productivity is more evident when firm-level political risk is interacted with competition, capital intensity and labor share. My results remain robust after addressing the potential endogeneity issue using an instrumental variable approach. Chapter 3 Debt financing is important for financing major investments in the biopharmaceutical industry. Debt financing allows companies to raise funds without giving up ownership or control through indenture of the company. In this study, I analyze the effects of debt financing decisions on profitability in the biopharmaceutical industry. I find that short-term debt, long-term debt and total debt negatively impacts return on assets (ROA) as a firm's profitability measure. A comparison is made between the US and Europe biopharmaceutical firms and the result shows the negative effects of short-term and long-term debt on profitability persist more for US biopharmaceutical firms than Europe firms. Short-term and long-term debt both impact profitability negatively with 10-year lagged R&D intensity and financial distress. Short-term debt's negative impact is stronger in post-Covid-19, indicating increased financial strain. Long-term debt consistently affects profitability negatively, with relative stable effects during the pre- and post-Covid-19.