Corporate Finance and Firm Pollution
46 Pages Posted: 18 Mar 2021 Last revised: 3 Mar 2022
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: Suggested Citation