Do banks value the eco-friendliness of the firms in their corporate lending decisions? Some empirical evidence

Nandy, Monomita and Lodh, Suman ORCID: https://orcid.org/0000-0002-4513-1480 (2012) Do banks value the eco-friendliness of the firms in their corporate lending decisions? Some empirical evidence. International Review of Financial Analysis, 25 . pp. 83-93. ISSN 1057-5219 [Article] (doi:10.1016/j.irfa.2012.06.008)

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Abstract

This study empirically investigates and explores the relationship between firms‘ environment consciousness and banks lending decision. We consider all US firms in the Kinder, Lydenberg and Domini Research & Analytics, Inc. social performance database for the year 1991 to 2006 and use their environment ranking along with the bank loan data from the Dealscan database with the relevant firm characteristics from Compustat. The findings indicate that bank incorporates firms‘ environment consciousness in their corporate lending decision. We establish that more eco-friendly firm, defined as a firm with higher environment score in the study, gets favorable loan contract than the firms with lower environment score. By considering firms‘ environment-consciousness in determining loan contract, banks can reduce their default risk. In addition, the other stakeholders of the business can also get benefits. The social implication of the study is also noteworthy. To get a favorable loan contract if firms become more environment- conscious, it will in turn benefit the whole society. The contribution of the banks can also expedite the Fed government‘s mitigation target achievement process. In sum, the corporate social responsibility, like eco-consciousness, can also be a determinant of cost of bank debt, which provides new insight to the policy makers and academicians.

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