Where Do Brown Companies Borrow From?

30 Pages Posted: 20 Oct 2022

See all articles by Irina Luneva

Irina Luneva

University of Pennsylvania - Accounting Department

Sergey Sarkisyan

The Wharton School, University of Pennsylvania

Date Written: October 16, 2022

Abstract

We study sources of debt for companies with poor ESG performance. Using a structural model of credit risk, we show that for low-ESG-rated firms, it is less expensive to borrow from banks than from public market compared to high-ESG-rated firms. As a result, after a company experiences an adverse ESG event, it starts borrowing more from banks than from the bond market. At the same time, we find that banks have incentives to discipline brown companies that they lend to: banks' stocks drop after a public announcement that a borrower experienced an adverse ESG event. The stronger the market's reaction and the more adverse events borrowers experience, the higher loan spreads that the banks set for their brown borrowers. We conclude that both loan and bond markets offer higher costs of debt to brown firms, but the bond market's "punishment" is higher than the loan market's.

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? (October 16, 2022). 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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