Do Banks Value Borrowers' Environmental Record? Evidence from Financial Contracts

55 Pages Posted: 9 Jul 2019

See all articles by I‐Ju Chen

I‐Ju Chen

Yuan Ze University - College of Management

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Chih-Yung Lin

National Chiao-Tung University

Tra Ngoc Vy Nguyen

Quy Nhon University

Date Written: July 1, 2018

Abstract

This paper investigates whether firms’ pollution records influence their financing costs. Evidence shows that lending banks demand significantly higher loan spreads, higher total borrowing costs, shorter loan maturities, smaller loan sizes, and greater collateral from firms with higher levels of chemical releases. The costly effects are stronger for firms with higher default risk and weaker corporate governance. Additonal results show that polluting firms face higher future stock volatility. This evidence supports the view that banks consider firms’ chemical releases when they make lending decisions.

Keywords: Chemical release, pollution record, bank loan spread, total cost of borrowing, corporate governance

JEL Classification: G21, G32, G34

Suggested Citation

Chen, I-Ju and Hasan, Iftekhar and Lin, Chih-Yung and Nguyen, Tra Ngoc Vy, Do Banks Value Borrowers' Environmental Record? Evidence from Financial Contracts (July 1, 2018). Available at SSRN: https://ssrn.com/abstract=3416019 or http://dx.doi.org/10.2139/ssrn.3416019

I-Ju Chen

Yuan Ze University - College of Management ( email )

135, Far-East Rd.,
Chung-Li, Taoyuan 32003
Taiwan

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Chih-Yung Lin (Contact Author)

National Chiao-Tung University ( email )

Taiwan

Tra Ngoc Vy Nguyen

Quy Nhon University ( email )

Quy Nhon University
Vietnam

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