The Spillover of Corporate ES on Bank Loan Cost

Abstract

We examine how corporate environmental and social (ES) risks influence the bank loan costs of peer firms. Utilizing a regression discontinuity approach based on shareholder votes on ES-related proposals in U.S. public companies from 2005 to 2021, we find that the approval of these proposals leads to an average 38 basis-point increase in peer firms' loan costs over the following year. This effect is more pronounced when the proposal is more salient for banks, and when peers have higher ex-ante ES risk and weaker bargaining power. Surprisingly, we find that the spillover is primarily driven by banks with less expertise or weaker ex-ante incentives to price ES risks. These findings suggest that corporate ES risks extend beyond individual firms and influence the loan costs of broader peer borrowers by shaping banks' loan pricing practices.

Keywords: Corporate ES risks, bank loan cost, spillover, regression discontinuity

JEL Classification: M14, G14, G21, G30