The Economic Consequences of Firms’ Commitment to ESG Policies

47 Pages Posted: 5 May 2021 Last revised: 23 Jun 2021

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Ilanit Gavious

Ben-Gurion University of the Negev

Chao Jin

HKUST Business School

Xinlei Li

Hong Kong University of Science and Technology

Date Written: February 2, 2021

Abstract

The largest U.S. banks have adopted, in a staggered manner, an environmental and social risk management framework. Based on a large sample of borrowers, utilizing a staggered difference-in-differences design, we document a significant increase in environmental protection provisions in the loan contract for borrowers that borrow from banks that adopted the framework. Moreover, we reveal a significant reduction in loan spreads, especially among borrowers who borrow from early EP adopters and borrowers who actively switch to banks that adopted the framework. Additionally, the cost of equity decreases for borrowers from banks that adopted the framework. Lastly, we document an increase in environmental performance for these borrowers after the contract. Taken together, our findings are consistent with firms being able to reduce their cost of capital by opting to commit to environmental protection through loan contracts.

Keywords: ESG, Cost of Debt, Credible Commitment, Cost of Equity

JEL Classification: D82, G21, G32

Suggested Citation

Amiram, Dan and Gavious, Ilanit and Jin, Chao and Li, Xinlei, The Economic Consequences of Firms’ Commitment to ESG Policies (February 2, 2021). HKUST Business School Research Paper No. 2021-29, Available at SSRN: https://ssrn.com/abstract=3838462 or http://dx.doi.org/10.2139/ssrn.3838462

Dan Amiram

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Ilanit Gavious

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
Israel

Chao Jin

HKUST Business School ( email )

Clear Water Bay
Kowloon
Hong Kong

Xinlei Li (Contact Author)

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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