The interplay of corporate finance and sustainability: Evidence from sustainability-linked lending, transparency initiatives and corporate litigation

This dissertation explores the interaction between corporate sustainability and corporate finance across three thematic areas. The first thematic area examines how the publication of the Carbon Disclosure Project’s (CDP) list, comprising companies that have refused to respond to the questionnaire on environmental data, affects these companies’ firm value (Chapter 2). Thereby, this chapter provides insights into whether this non-disclosure campaign conducted by the CDP is effective in exerting capital market pressure on companies that refuse to disclose environmental data. The analysis identifies a significantly negative valuation effect for smaller and less profitable companies on the CDP’s list. The second thematic area focuses on sustainability-linked lending (Chapters 3 to 6). Chapters 3 and 4 provide an overview of the design of the sustainability-related attributes which define sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs). More specifically, these chapters discuss the sustainability targets and the financial incentivization mechanisms that connect these targets to the financing terms of these debt products. Subsequently, Chapters 5 and 6 address empirical questions in sustainability-linked lending. Chapter 5 initially examines the pricing of SLLs in the debt capital market and finds that SLLs are priced with initial spreads that are, on average, 9.5 basis points lower than the initial spreads of conventional loans from the same issuer with similar characteristics. This pricing advantage for the borrower is greater for borrowers characterized by a strong environmental profile and for loans originated with a lending syndicate characterized by strong environmental characteristics. Chapter 6 investigates the perception of SLB issuances in the equity market by analyzing abnormal stock returns around the announcement of SLB issues. The study identifies a positive announcement effect, which however only remains significant for certain issuers with specific characteristics in the two subsequent trading weeks. Over this period, issuers with a strong environmental profile, as well as those that have not issued use-of-proceeds bonds before the SLB issue, experience significantly more positive stock market reactions than the corresponding issuers that have weaker environmental attributes or those that have issued use-of-proceeds bonds previously. The final thematic area of this dissertation examines the influence of security class action lawsuits (SCAs) on the corporate governance structures of the defendant companies’ competitors (Chapter 7). Initially, the study presents evidence for two benefits resulting from robust governance structures in the context of corporate litigation. Specifically, the results suggest that robust corporate governance significantly mitigates the risk of being sued in an SCA and, in the event of litigation, also protects the value of the defendant company and to a lower extent that of its competitors. The study argues that these two benefits of robust governance structures should incentivize the competitors of SCA defendants to revise their own governance mechanisms following an SCA in the same industry. Consequently, the study analyzes the development of the SCA defendants’ industry competitors’ governance mechanisms after the SCA using a generalized difference-in-difference approach. The results provide evidence on significantly enhanced governance structures among the competitors of SCA defendants in the years following the SCA. A deeper analysis of the individual governance components reveals that the competitors of SCA defendants particularly enhance the independence of their boards by increasing the proportion of outside directors and the expertise of their boards by increasing the proportion of directors with financial or industry-specific backgrounds.