Corporate Environmental Management and Credit Risk

Abstract:     
This study analyzes corporate environmental management and its implications for bond investors. We provide support for the view that the credit standing of borrowing firms is influenced by legal, reputational, and regulatory risks associated with environmental incidents. Using environmental information on 582 U.S. public corporations between 1995 and 2006, we document that (i) environmental concerns are associated with a higher cost of debt financing and lower credit ratings, and (ii) proactive environmental practices are associated with a lower cost of debt. The results are robust to numerous controls for company and bond specific characteristics, alternative model specifications, and industry membership.

Number of Pages in PDF File: 44

Keywords: Environmental Risk Management, Cost of Debt, Credit Ratings, Litigation, Regulatory Risk, Reputation Risk, Climate Change

JEL Classification: G32, G33, Q51, Q56, M49, K32

working papers series