Corporate Finance and Firm Pollution

46 Pages Posted: 18 Mar 2021 Last revised: 3 Mar 2022

See all articles by Xiaoyi Lyu

Xiaoyi Lyu

Shanghai University of Finance and Economics

Chenyu Shan

Shanghai University of Finance and Economics

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Date Written: March 1, 2022

Abstract

We examine how financing choices affect the amount of pollution emitted by a firm. Servicing debt can be a higher priority for borrowers than protecting their environment. Indeed, we find that firms increase their toxic releases after issuing debt. The debt issuance effect is significant after considering the endogeneity of the debt issuance. Firms also increase their pollution intensity after using debt. Consistent with the short-term pressure on issuers associated with debt repayment, we find that pollution increases when firms have debt coming due, and loan covenants are more binding. The debt-financing effect is more pronounced when firm assets are less redeployable, environmental protection is not monitored by the local government, or the community cares less about the environment. Overall, our findings suggest that firms sacrifice their environment to please their creditors.

Keywords: Corporate finance; Debt financing; Toxics release; Pollution

JEL Classification: G21; G32

Suggested Citation

Lyu, Xiaoyi and Shan, Chenyu and Tang, Dragon Yongjun, Corporate Finance and Firm Pollution (March 1, 2022). Available at SSRN: https://ssrn.com/abstract=3805629 or http://dx.doi.org/10.2139/ssrn.3805629

Xiaoyi Lyu (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Chenyu Shan

Shanghai University of Finance and Economics ( email )

100 Wudong Road
Shanghai
China

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

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