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Environmental inefficiency and bond credit rating

Brian Chabowski, Wen-Chyuan Chiang, Kailing Deng and Li Sun

Journal of Economics and Business, 2019, vol. 101, issue C, 17-37

Abstract: This study examines the impact of a firm’s polluting activities (measured as environmental inefficiency) on the firm’s bond credit rating. We posit that firms with excessive polluting activities (i.e., a high level of environmental inefficiency) receive low bond ratings because prior research links pollution reduction to better firm performance and outcomes. Using a 29-year panel sample with 4969 firm-year observations (representing 310 unique firms) from 1987 to 2015, we find a significant negative relation between environmental inefficiency and bond ratings. Our results still hold after a battery of robustness checks. In addition, we find that our results are largely driven by firms that are not near a broad bond rating change (i.e., firms without a plus or minus specification in their bond ratings).

Keywords: Environmental inefficiency; Environmental activities; Bond credit ratings (search for similar items in EconPapers)
JEL-codes: G24 M49 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jeconbus.2018.08.003

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