Corporate Environmental Liabilities and Capital Structure

44 Pages Posted: 17 Jul 2018

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Kangkang Fu

Hong Kong Baptist University

Tao Li

Central University of Finance and Economics (CUFE) - School of Economics

Lewis Tam

Faculty of Business Administration, University of Macau

George Wong

The Hong Kong Polytechnic University

Date Written: June 22, 2018

Abstract

We investigate the capital structure implications of corporate environmental liabilities, which are captured using the amount of firms’ toxic production-related waste. We document that firms with higher environmental liabilities maintain lower financial leverage ratios, suggesting that environmental liabilities work as a substitute for financial liabilities. The substitution effect is more pronounced for larger firms, firms covered by more analysts, firms that have higher sales to principal customers, and firms with greater community concerns. Further analysis shows that less environmentally responsible firms have a lower fraction of bank debt in total debt, all else equal, consistent with the notion that banks are more environmentally sensitive than other lenders. Overall, our findings imply that being environmentally responsible can enhance firms’ debt capacity and improve the availability of bank credit.

Keywords: corporate social responsibility, environmental liability, capital structure, bank debt

JEL Classification: G32, L11

Suggested Citation

Chang, Xin and Fu, Kangkang and Li, Tao and Tam, Lewis and Wong, George, Corporate Environmental Liabilities and Capital Structure (June 22, 2018). Available at SSRN: https://ssrn.com/abstract=3200991 or http://dx.doi.org/10.2139/ssrn.3200991

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-01B-40 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: https://personal.ntu.edu.sg/changxin/

Kangkang Fu (Contact Author)

Hong Kong Baptist University ( email )

34 Renfrew Road
Wing Lung Bank Building for Business
Hong Kong
Hong Kong

Tao Li

Central University of Finance and Economics (CUFE) - School of Economics ( email )

Beijing
China

Lewis Tam

Faculty of Business Administration, University of Macau ( email )

Room E22-4055, University of Macau
Avenida da Universidade
Taipa
Macau

George Wong

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom, Kowloon, 0
Hong Kong
852 3400 3459 (Phone)
852 2330 9845 (Fax)

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