Corporate Sustainability Performance and Bank Loan Pricing: It Pays to Be Good, but Only When Banks Are Too
52 Pages Posted: 10 Nov 2017 Last revised: 9 Dec 2017
Date Written: November 1, 2017
This study examines whether and under what conditions corporate sustainability performance is reflected in bank loan prices. By taking the sustainability performance of the lending bank into account, I show that borrowers with strong sustainability performance pay lower loan spreads than borrowers with weak sustainability performance--however, only when the lending bank exhibits strong sustainability performance. The findings hold across various methodological approaches including sample splits, interaction effects, propensity score matching, and identification using within-firm and within-bank differences as well as shocks in ESG performances while controlling for a wide range of possible confounding effects. I discuss three explanatory mechanisms for the relationship: improved credit risk, increase in trust due to similarity between banks and borrowers, and reputation risk. The study reveals that the relationship between sustainability performance and loan prices is driven by a premium in loan spreads for borrowers with weak sustainability performance, rather than a spread discount for strong sustainability performance. I show that the results are not driven by measurement error or selection of borrowers to banks. Consistent with the notion that the availability of sustainability information and scrutiny have been increasing, the results of this study reveal that the relationship between borrower sustainability performance and loan pricing is stronger in more recent years.
Keywords: Loan Pricing, Syndicated Loans, Sustainability, Corporate Social Responsibility, ESG
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