We show that state right-to-work (RTW) laws significantly encourage corporate innovations in terms of patent grant and citation count. Consistent with the conjecture that the RTW-treated firms conduct more innovations due to their decreased financial distress risk, we find that the RTW adoption also significantly decreases treated firms' financial distress risk ex post, and its treatment effect on innovation outputs is stronger for treated firms that are ex ante more likely to experience financial distress. Further analysis indicates that treated firms intensify research and development expenditures and, likely due to their improved innovations, enhance their competitiveness in product markets.

This research exploits Australia's ratification of the Kyoto Protocol, which mandates the country to reduce carbon emissions, thereby exposing Australian firms to increased carbon risk, as a quasi-natural experiment to examine the causal effect of carbon risk on firm capital structure. We find that the Kyoto Protocol ratification leads to a decrease in financial leverage of heavy carbon emitting firms and such a decrease is more pronounced for financially constrained firms. Further analysis indicates that increased carbon risk leads to higher financial distress risk, which motivates firms to decrease financial leverage.