Banks vs. markets: Are banks more effective in facilitating sustainability?

David P. Newton, Steven Ongena, Ru Xie and Binru Zhao ()

No 5/2022, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: Is bank- versus market-based financing different in its attitudes towards Environmental, Social, and Governance (ESG) risk? Using a novel sample covering 3,783 U.S. public firms from 2007 to 2020, we study how firm-level ESG risk affects its financing outcomes. We find that companies with higher ESG risk borrow less from banks than from markets, potentially to avoid bank monitoring and scrutiny. The Social and Governance components, in particular, matter. Furthermore, firms suffering higher numbers of negative ESG reputation shocks are less likely to continue to rely on bank credit in response to lenders' threats to end the lending arrangements. Finally, our results indicate that firms' ESG risk reduces after borrowing from banks but increases after bond issuance, suggesting that banks are more effective than public bond markets in shaping borrowers' ESG performance.

Keywords: ESG risk; debt structure; capital structure; debt choices; bank monitoring (search for similar items in EconPapers)
JEL-codes: G20 G21 G30 G32 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cfn and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:bdp2022_005

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