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

I-Ju Chen (), Iftekhar Hasan, Chih-Yung Lin and Tra Ngoc Vy Nguyen ()
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I-Ju Chen: Yuan Ze University
Tra Ngoc Vy Nguyen: Quy Nhon University

Journal of Business Ethics, 2021, vol. 174, issue 3, No 11, 687-713

Abstract: 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.

Keywords: Chemical emissions; Pollution record; Bank sustainability performance; Corporate governance; Business ethics (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (20)

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DOI: 10.1007/s10551-020-04621-2

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