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Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability?

Author

Listed:
  • David Newton

    (University of Bath - School of Management)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • Ru Xie

    (University of Bath, School of management)

  • Binru Zhao

    (University of Bath - School of Management)

Abstract

Is bank- versus market-based financing different in its attitudes towards Environmental, Social, and Governance (ESG) risk? Using a novel sample covering 3,783 U.S. public firms from 2007 to 2020, we study how firm-level ESG risk affects its financing outcomes. We find that companies with higher ESG risk borrow less from banks than from markets, potentially to avoid bank monitoring and scrutiny. The Social and Governance components, in particular, matter. Furthermore, firms suffering higher numbers of negative ESG reputation shocks are less likely to continue to rely on bank credit in response to lenders' threats to end the lending arrangements. Finally, our results indicate that firms' ESG risk reduces after borrowing from banks but increases after bond issuance, suggesting that banks are more effective than public bond markets in shaping borrowers' ESG performance.

Suggested Citation

  • David Newton & Steven Ongena & Ru Xie & Binru Zhao, 2022. "Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability?," Swiss Finance Institute Research Paper Series 22-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2222
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    Cited by:

    1. repec:osf:socarx:z2ums_v1 is not listed on IDEAS
    2. Angelo Leogrande & Domenico Leogrande & Alberto Costantiello, 2023. "The Role of Unemployment in the ESG Model at World Level," Working Papers hal-04154793, HAL.
    3. Sobiech, Anna L. & Uchida, Hirofumi, 2025. "Characteristics of green loan users and the green policy mix," Energy Economics, Elsevier, vol. 143(C).

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    Keywords

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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