Abstract:

In this paper, we investigate stakeholder theory by focusing on two nonshareholder stakeholder groups (creditors and environment). We find strong evidence that implementing environment-friendly practices reduces borrowing costs and limits the use of financial covenants. In addition, we document that relationship lenders incorporate the levels of and changes in environmental management in loan pricing, whereas first-time lenders only care about the levels of environmental management. We also report that firms with better environmental practices have more stable income streams, lower leverage ratios, and better future valuations. Taking a contingency perspective, we find that the effect of environmental management on loan costs is more pronounced when borrowing firms face higher industry competition and stronger environmental stringency. In addition, borrowers with better green management are less likely to violate covenants, default on loans, or file bankruptcy. This conclusion sheds further light to the green finance policy debate among central banks and regulators on whether they should consider incentives for green loans via policy instruments such as lower capital requirements for bank financing of green assets.

Full Text(PDF): Are Green Companies Less Risky and Getting Lower Cost Bank Loans? A Stakeholder-Management Perspective