Do Banks Value Borrowers' Environmental Record? Evidence from Financial Contracts
55 Pages Posted: 9 Jul 2019
Date Written: July 1, 2018
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: Suggested Citation