Governance and climate-related risk in firm financing: evidence for a climate contingent agency framework

This study examines how ownership structure shapes firms’ financing decisions under climate-related risk in developing economies, with a particular focus on MSMEs. Using firm-level data from the World Bank Enterprise Survey across 41 countries, the analysis distinguishes between physical climate exposure and climate-adjusted credit risk within a climate-contingent agency framework. The results show that ownership structure has limited direct effects on leverage in low-risk settings. However, climate-adjusted credit risk significantly increases firms’ reliance on debt and reduces equity positions. Importantly, governance becomes economically relevant through interaction effects, whereby manager managed firms increase their reliance on formal debt financing more strongly than owner-managed firms as climate-related financial risk rises. Physical climate exposure plays a weaker and less consistent role. The study’s novelty lies in introducing a climate-contingent agency framework, with implications for climate-responsive MSME finance, and contributes to the literature by integrating governance and climate risk into capital structure analysis.