Where Do Brown Companies Borrow From?

36 Pages Posted: 20 Oct 2022 Last revised: 26 Dec 2023

See all articles by Irina Luneva

Irina Luneva

University of Pennsylvania - Accounting Department

Sergey Sarkisyan

The Wharton School, University of Pennsylvania

Date Written: November 10, 2023

Abstract

We study cost and sources of debt for companies with poor ESG performance. We find that, while both loan and bond financing are costlier for borrowers with poor ESG performance, ``brown" firms face a lower extra premium for borrowing from banks than ``green" firms. In addition, companies with poorer ESG performance obtain larger bank loans and borrow smaller amounts from the public bond market, gradually shifting their debt structure towards more bank-loan-heavy. We discuss multiple explanations for our findings: brown borrowers' financial risk, banks' superior information about their borrowers, public debt holders' inherent preference for high ESG performance firms, and public debt holders being subject to stricter ESG regulation than banks.

Keywords: ESG performance, debt structure, cost of debt

JEL Classification: G12, G21, D62

Suggested Citation

Luneva, Irina and Sarkisyan, Sergey, Where Do Brown Companies Borrow From? (November 10, 2023). Available at SSRN: https://ssrn.com/abstract=4249210 or http://dx.doi.org/10.2139/ssrn.4249210

Irina Luneva

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
+1(347)659-8084 (Phone)

Sergey Sarkisyan (Contact Author)

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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