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Do banks value the eco-friendliness of firms in their corporate lending decision? Some empirical evidence

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  • Nandy, Monomita
  • Lodh, Suman

Abstract

This study empirically investigates and explores the relationship between firms' environment consciousness and banks lending decision. We consider all US firms' in the Kinder, Lydenberg and Domini Research & Analytics, Inc. social performance database for the year 1991 to 2006 and use their environment ranking along with the bank loan data from the Dealscan database with the relevant firm characteristics from Compustat. The findings indicate that bank incorporates firms' environment consciousness in their corporate lending decision. We establish that more eco-friendly firm, defined as a firm with higher environment score in the study, gets a favorable loan contract than the firms with lower environment score. By considering firms' environment-consciousness in determining loan contract, banks can reduce their default risk. In addition, the other stakeholders of the business can also get benefits. The social implication of the study is also noteworthy. To get a favorable loan contract if firms' become more environment-conscious, it will in turn benefit the whole society. The contribution of the banks can expedite the Fed government's mitigation target achievement process. In sum, the corporate social responsibility, like eco-consciousness, can also be a determinant of cost of bank debt, which provides new insight to the policy makers and academicians.

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  • Nandy, Monomita & Lodh, Suman, 2012. "Do banks value the eco-friendliness of firms in their corporate lending decision? Some empirical evidence," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 83-93.
  • Handle: RePEc:eee:finana:v:25:y:2012:i:c:p:83-93
    DOI: 10.1016/j.irfa.2012.06.008
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    Cited by:

    1. Caporale, Guglielmo Maria & Lodh, Suman & Nandy, Monomita, 2017. "The performance of banks in the MENA region during the global financial crisis," Research in International Business and Finance, Elsevier, vol. 42(C), pages 583-590.
    2. repec:kap:jbuset:v:143:y:2017:i:1:d:10.1007_s10551-015-2758-2 is not listed on IDEAS
    3. Guglielmo Maria Caporale & Suman Lodh & Monomita Nandy, 2015. "How Has the Global Financial Crisis Affected Syndicated Loan Terms in Emerging Markets? Evidence from China," CESifo Working Paper Series 5353, CESifo Group Munich.
    4. Andreas Hoepner & Ioannis Oikonomou & Bert Scholtens & Michael Schröder, 2016. "The Effects of Corporate and Country Sustainability Characteristics on The Cost of Debt: An International Investigation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(1-2), pages 158-190, January.
    5. repec:gam:jsusta:v:10:y:2017:i:1:p:13-:d:123875 is not listed on IDEAS
    6. repec:eee:mulfin:v:40:y:2017:i:c:p:33-46 is not listed on IDEAS
    7. Rodrigo Zeidan & Claudio Boechat & Angela Fleury, 2015. "Developing a Sustainability Credit Score System," Journal of Business Ethics, Springer, vol. 127(2), pages 283-296, March.
    8. repec:eee:intfin:v:52:y:2018:i:c:p:240-261 is not listed on IDEAS
    9. Kim, Moshe & Surroca, Jordi & Tribó, Josep A., 2014. "Impact of ethical behavior on syndicated loan rates," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 122-144.

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