The Impact of Climate Risk Vulnerability on Dividend Policy. Empirical Evidence for European Firms

ABSTRACT The importance of climate risk for business and finance is increasingly recognized in the literature. However, little is known about the nexus between climate change and dividend policy. The goal of the paper is to examine the relationship between climate vulnerabilities (CVUL) and the dividend policy adopted by European listed firms over the period 2010–2021. The results of the random‐effects panel logit model show that firms are less likely to pay dividends if they are located in countries more exposed to CVUL. In the second part of the empirical analysis, the nexus between CVUL and the level of dividend payments is analyzed. The results of the Prais–Winsten regression model with panel‐corrected standard errors (PCSE) show that CVUL is associated with lower cash dividend payments. The robustness of these findings is tested by employing different subsamples of firms and different estimation methods (e.g., system GMM). Furthermore, the results show that in financially developed economies, firms respond more strongly to climate‐related risks by reducing dividend distributions. Overall, the empirical results highlight the importance of climate change for the decision‐making framework at the firm level, emphasizing the need for policymakers to develop targeted strategies that support corporate resilience and financial stability in the face of CVUL.