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Climate Reputation and Bank Loan Contracting

Author

Listed:
  • Karel Hrazdil

    (Simon Fraser University
    Chongqing University of Technology)

  • Deniz Anginer

    (Simon Fraser University)

  • Jiyuan Li

    (Chongqing University of Technology)

  • Ray Zhang

    (Simon Fraser University)

Abstract

We investigate how negative news coverage of borrower’s impacts on climate change affects bank loan contracting. Using a sample of publicly traded US firms for the period 2000–2016, we show that loans initiated following negative news coverage about firm’s adverse climate-related incidents have significantly higher spreads, shorter maturities, more covenant restrictions, and a higher likelihood of collateral security requirements. We find no changes in client firm’s credit fundamentals after such incidents, indicating that lender’s reputational concerns rather than the longer-term environmental impacts of their borrower’s actions are the primary drivers of these changes. This observation highlights the need for increased scrutiny of banks’ lending practices to ensure that they are genuinely committed to sustainability rather than merely engaging in symbolic actions.

Suggested Citation

  • Karel Hrazdil & Deniz Anginer & Jiyuan Li & Ray Zhang, 2024. "Climate Reputation and Bank Loan Contracting," Journal of Business Ethics, Springer, vol. 192(4), pages 875-896, July.
    • Handle: RePEc:kap:jbuset:v:192:y:2024:i:4:d:10.1007_s10551-023-05517-7
    DOI: 10.1007/s10551-023-05517-7
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    More about this item

    Keywords

    Bank loan pricing; Climate finance; Climate reputation risk; Adverse climate-related incidents; Environmental; social; and governance (ESG) incidents; Cost of capital;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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