THE THE IMPACT OF CLIMATE RISK ON FIRM’S DEBT FINANCING DECISIONS: EMPIRICAL EVIDENCE FROM VIETNAM

Abstract

This study examines the effect of physical climate risk on corporate debt financing decisions among listed firms in Vietnam, an emerging market highly vulnerable to climate-related hazards. Using firm-level data from Vietnamese listed companies for the period 2011–2022 and the Climate Physical Risk Index (CPRI) developed by Guo, Ji, and Zhang (2024), the study employs summary statistics, correlation analysis, industry-fixed effects, and year-fixed effects to investigate firms’ capital structure responses to climate risk. The findings reveal a significant negative association between physical climate risk and corporate leverage, indicating that firms tend to adopt more conservative debt financing strategies when exposed to higher climate-related risks. This relationship is consistent with the Trade-off Theory, as greater climate-related uncertainty may increase expected financial distress costs, while the Pecking Order Theory suggests that firms may prefer internal financing under increased uncertainty and information asymmetry. The findings contribute to the climate finance literature by providing firm-level evidence from Vietnam and demonstrating how physical environmental risks can influence corporate financing decisions in an emerging market. The study also highlights that climate risk does not necessarily lead to higher borrowing for adaptation, although previous evidence suggests that firms may increase debt temporarily to finance reconstruction and climate resilience following severe disasters. Practically, the findings emphasize the importance of incorporating climate risk into corporate financial planning, credit assessment, financial disclosure, and disaster-risk management frameworks. Future research should employ more granular province-level or firm-specific climate exposure measures and examine how ESG practices and green financial instruments influence the relationship between physical climate risk and corporate financing decisions.