Public Environmental Enforcement and Private Lender Monitoring: Evidence from Environmental Covenants
66 Pages Posted: 16 Jun 2021 Last revised: 15 Sep 2021
Date Written: September 14, 2021
In this study, we examine the interplay between public environmental enforcement and private lender monitoring and its effects on borrowers’ environmental activities. To capture lender environmental monitoring, we use environmental covenants in loan agreements that require borrowers to take environmental remedial actions, disclose adverse environmental events, or conduct environmental audits. We predict and find that, in the presence of higher regulatory enforcement intensity, loan agreements are more likely to include environmental covenants when loans are secured by real property versus non-real property and when borrowers belong to more polluting industries. We further find that after loan initiations, borrowers with environmental covenants in loan contracts have lower toxic chemical releases when they are located in states with higher regulatory enforcement intensity. Taken together, our findings suggest that public environmental enforcement reinforces lenders’ environmental monitoring that has positive externalities in shaping borrowers’ environmental activities.
Keywords: Public Environmental Enforcement, Private Lender Monitoring, Environmental Covenants, Debt Contracting
JEL Classification: G00, G21, G30, G38, M40
Suggested Citation: Suggested Citation