Environmental Regulation and the Cost of Bank Loans: International Evidence

56 Pages Posted: 1 Apr 2019

See all articles by Amirhossein Fard

Amirhossein Fard

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Siamak Javadi

University of Texas - Rio Grande Valley

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Date Written: March 7, 2019

Abstract

Using a sample of 27 countries between 1990 and 2014, we find that banks charge a higher interest rate on their loans when lending to firms that face more stringent environmental regulations. Further, we show that firms facing such regulations maintain lower financial leverage, incur more operating expenses, and have fewer banks participating in their loan syndicate. The results of the subsample analysis suggest that the increase in the cost of bank loans is more pronounced for financially constrained firms, firms in industries with high environmental litigation risk, and those located in bank-based economies. Overall, our results provide evidence that the observed higher loan spread is the result of environmentally sensitive lending practices by banks.

Keywords: Environmental Regulations; Business Risk; Bank Loan Contracting

JEL Classification: G21; G32; Q51

Suggested Citation

Fard, Amirhossein and Javadi, Siamak and Kim, Incheol, Environmental Regulation and the Cost of Bank Loans: International Evidence (March 7, 2019). Available at SSRN: https://ssrn.com/abstract=3348758 or http://dx.doi.org/10.2139/ssrn.3348758

Amirhossein Fard (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Drive
Edinburg, TX 78541
United States

Siamak Javadi

University of Texas - Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

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