Financing sustainability: How environmental disclosures shape bank lending decisions in emerging markets

As global awareness of environmental responsibilities intensifies, the significance of corporate Environmental information disclosure (EID) in decision‐making becomes increasingly prominent. However, its influence on bank lending decisions, especially in emerging markets like China, remains debated. Using 27,095 firm‐year observations between 2008 and 2020, this study examines the impact of both voluntary and mandatory EID on bank lending decisions. Findings indicate that banks incorporate EID into their lending decisions, offering favorable bank loan terms, both in terms of size and costs to firms with strong EID. To mitigate endogeneity concerns, we employ propensity score matching and a difference‐in‐difference methodology grounded in China's newly amended Environmental Protection Law, with consistent results across both tests. Our research identifies two possible economic mechanisms to explain why EID influences bank loan features: EID's potential to reduce firm‐specific risks and its alignment with local governmental incentives for green finance. Furthermore, our research suggests that voluntary EID, previously overlooked, proves more valuable than mandatory EID. We also find that the effectiveness of EID relies on banks' evaluations of the firm's sincerity and incentives behind the disclosure. Banks show a preference for voluntary EID from firms with minimal adverse selection concerns and mandatory EID from those highly motivated to disclose voluntarily. Moreover, we identify a synergy between EID and bank loans in fostering green innovation. This research not only bridges gaps in the existing bank financing literature but also offers insights into how EID can drive sustainable economic activities in developing economies.