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

66 Pages Posted: 16 Jun 2021 Last revised: 15 Sep 2021

See all articles by Stacey Choy

Stacey Choy

University of Toronto - Rotman School of Management

Shushu Jiang

University of Toronto - Rotman School of Management

Scott Liao

University of Toronto - Rotman School of Management

Emma Wang

University of Toronto - Rotman School of Management

Date Written: September 14, 2021

Abstract

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

Choy, Stacey and Jiang, Shushu and Liao, Wei-Yi (Scott) and Wang, Emma, Public Environmental Enforcement and Private Lender Monitoring: Evidence from Environmental Covenants (September 14, 2021). Available at SSRN: https://ssrn.com/abstract=3860178 or http://dx.doi.org/10.2139/ssrn.3860178

Stacey Choy

University of Toronto - Rotman School of Management

Toronto, Ontario
Canada

Shushu Jiang

University of Toronto - Rotman School of Management ( email )

105 St George St
Toronto, ON M5S3E6
Canada

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

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

Emma Wang

University of Toronto - Rotman School of Management ( email )

105 St George St
Toronto, Ontario M5S3E6
Canada

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