Increasingly adverse climatic conditions have created greater systematic risk for companies throughout the global economy. Few studies have directly examined the consequences of climate-related risk on financing choices by publicly-listed firms across the globe. We attempt to do so using the Global Climate Risk Index compiled and published by Germanwatch (Kreft & Eckstein, 2014), which captures at the country level the extent of losses from extreme weather events. As expected, we find the likelihood of loss from major storms, flooding, heat waves, etc. to be associated with lower and more volatile earnings and cash flows. Consistent with policies that attempt to moderate such effects, we show that firms located in countries characterized by more severe weather are likelier to hold more cash so as to build financial slack and thereby organizational resilience to climatic threats. Those firms also tend to have less short-term debt but more long-term debt, and to be less likely to distribute cash dividends. In addition, we find that certain industries are less vulnerable to extreme weather and so face less climate-related risk. Our results are robust to using an instrumental variable approach, a propensity-score-matched sample, and path analysis, and remain unchanged when we consider an alternative measure of climate risk. Finally, our conclusions are invariant to the timing of financial crises that can affect different countries at different times.

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Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.

We study the relationship between societal trust and risk-taking in the banking industry. Prior literature has found that societal trust is positively related to both financial reporting conservatism and financial reporting transparency, which reduce bank managers’ ability to take excessive risk. Additionally, bank managers in high-trust countries are more likely to exhibit higher pro-social behavior and, therefore, less likely to take excessive risk for personal benefit. Consistent with these arguments, we document that banks in countries with higher societal trust exhibit lower risk-taking and that these banks also experienced less financial trouble and fewer failures during the 2007–2009 financial crisis.