Public Environmental Enforcement and Private Lender Monitoring: Evidence from Environmental Covenants

70 Pages Posted: 16 Jun 2021 Last revised: 15 Jul 2023

See all articles by Stacey Choy

Stacey Choy

University of Illinois at Urbana-Champaign - Gies College of Business

Shushu Jiang

National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN)

Scott Liao

University of Toronto - Rotman School of Management

Emma Wang

Cornell University - Dyson School of Applied Economics and Management

Date Written: July 15, 2023

Abstract

This paper examines whether and how public environmental enforcement affects private lenders’ monitoring efforts and the effectiveness of such monitoring. We capture lender monitoring using environmental covenants in loan agreements. Consistent with the prediction that stringent public environmental enforcement increases lenders’ monitoring incentives, we find that in the presence of higher environmental regulatory enforcement intensity, lenders are more likely to use environmental covenants when lending to polluting borrowers and when the loans are secured by real property collateral. Moreover, consistent with the prediction that stringent public environmental enforcement facilitates lender monitoring, we find that environmental covenants are more effective in reducing borrowers’ toxic chemical releases when environmental regulatory enforcement is stronger. Taken together, our findings corroborate the importance of public environmental enforcement in inducing lenders’ monitoring efforts, as well as the joint role of public enforcement and private lender monitoring in curbing corporate pollution.

Keywords: Public environmental enforcement, private lender monitoring, environmental covenants, debt contracting

JEL Classification: G00, G21, G30, G38, M40

Suggested Citation

Choy, Stacey and Jiang, Shushu and Liao, Wei-Yi (Scott) and Wang, Yu, Public Environmental Enforcement and Private Lender Monitoring: Evidence from Environmental Covenants (July 15, 2023). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3860178 or http://dx.doi.org/10.2139/ssrn.3860178

Stacey Choy

University of Illinois at Urbana-Champaign - Gies College of Business ( email )

1206 South 6th Street
IL 61820

HOME PAGE: http://stacey-choy.github.io/

Shushu Jiang

National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN) ( email )

Singapore

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Yu Wang

Cornell University - Dyson School of Applied Economics and Management ( email )

Warren Hall, 137 Reservoir Ave
Ithaca, NY 14853
United States

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