Corporate Environmental Liabilities and Capital Structure

Environmental regulation and the cost of bank loans: International evidence

“…Our evidence is consistent with these predictions. First, similar to the main result in Chang et al (2018), we find a negative relationship between EPS and firms' debt ratio, indicating that firms maintain lower leverage when facing stronger environmental regulations. This result is consistent with the idea that environmental liability can substitute for financial leverage.…”

“…Parallel to the rise of socially responsible investing, there has been substantial growth in environmentally sensitive lending as well (Chava, 2014;Cogan, 2008). 3 Evidence suggests banks are more sensitive to environmental issues than other lenders (Chang et al, 2018). Moreover, bank loans have historically been arguably one of the most important sources of external finance (Houston and James, 1996).…”

“…Environmental liabilities are legally binding, can potentially lead to a substantial and continuous outflow of funds, and failure to comply may lead to downgrades in bond rating (Graham et al, 2001), ultimately resulting in lawsuits or bankruptcy (Schneider, 2011;Chang et al, 2018). In particular, Chang et al (2018) find a negative relationship between environmental liabilities and financial leverage and conclude that environmental liability is a (an imperfect) substitute for financial liability and that firms with better environmental profiles have enhanced debt capacity and better access to bank loans. Anecdotal evidence also supports the idea that environmental liability risk is relevant and has increased substantially around the world.…”

(Debt) Overhang: Evidence from Resource Extraction

“…4 Further, both Rauh (2009) and Akey and Appel (2020) document evidence of the effect non-debt liabilities can have on manage-rial risk-shifting behavior. Finally, Chen et al (2018) and Chang et al (2018) show that operating leverage and corporate environmental liabilities, respectively, are substitutes for traditional debt liabilities.…”

Pollution and Human Capital Migration: Evidence from Corporate Executives

“…Given that exposure to toxic pollutants has adverse health effects, the opening of a toxic emitting plant could trigger the migration of workers from neighboring firms and this migration could harm the firm from which they are separating. While research shows that people migrate away from polluted areas (Chen, Oliva, and Zhan 2017) and shareholders, households, firms, and markets react to environmental factors (e.g., Flammer 2013;Agarwal Sing, and Yang 2019;Agarwal, Wang, and Yang 2019;Chang et al 2019;Li, Massa, Zhang, and Zhang 2019), we are unaware of systematic research into the impact of pollution on the migration of highly-valued employees and the resultant effects of those separations on their former firms.…”