Do Banks Value Borrowers' Environmental Record? Evidence from Financial Contracts

I. Ju Chen, Iftekhar Hasan*, Chih-Yung Lin, Tra Ngoc Vy Nguyen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Banks play a unique role in society. They not only maximize profits but also consider the interests of stakeholders. We investigate whether banks consider firms’ pollution records in their lending decisions. The evidence shows that banks offer significantly higher loan spreads, higher total borrowing costs, shorter loan maturities, and greater collateral to firms with higher levels of chemical pollution. The costly effects are stronger for borrowers with greater risk and weaker corporate governance. Further, the results show that banks with higher social responsibility account for their borrowers’ environmental performance and charge higher loan spreads to those with poor performance. These results support the idea that banks with higher social responsibility can promote the practice of business ethics in firms.

Original languageEnglish
JournalJournal of Business Ethics
DOIs
StateAccepted/In press - 2020

Keywords

  • Bank sustainability performance
  • Business ethics
  • Chemical emissions
  • Corporate governance
  • Pollution record

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