Environmental Regulation and the Cost of Bank Loans: International Evidence
70 Pages Posted: 1 Apr 2019 Last revised: 2 Nov 2020
Date Written: March 7, 2019
Using a sample of 27 countries between 1990 and 2014, we find that banks charge higher interest rates and adjust other contractual features of their loans when lending to firms facing more stringent environmental regulations. Our evidence suggests that lenders’ concerns about the increase in environmental liabilities resulting from regulations is driving the results. Specifically, we show that firms facing such regulations have fewer participants in their loan syndicates, higher bankruptcy risk, and lower credit ratings, despite reducing their leverage. Overall, our results indicate 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: Suggested Citation