Fresh start or fresh water: The impact of environmental lender liability

Abstract

fresh start or fresh water: the impact of environmental lender liability aymeric bellon ∗ wharton job market paper [click here for the latest version] november 26, 2021 abstract this paper investigates how the environmental liability of lenders affects debtors’ behavior. i use u.s. census bureau micro-data and the passage of the lender liability act as a novel identification strategy to answer this question. firms increase on-site pollution, cut investment in abatement technology, and incur 17.54% more environmental regulatory violations when secured lenders become less responsible for the cleanup cost of their collateral. the effects are stronger for firms close to bankruptcy or with high environmental risks. this lower environmental compliance slightly benefits employment, but does not change wages or production. overall, financial constraints that may be alleviated due to reduced lender liability do not result in pollution mitigation investment or increased production; instead, my findings suggest that reduced lender liability lessens banks’ incentives to influence the practices of their debtors. ∗university of pennsylvania, the wharton school. email: abellon@wharton.upenn.edu. i would like to thank the members of my phd committee, namely erik p. gilje, michael r. roberts, michael schwert, and luke a. taylor, for their outstanding guidance and support, as well as ian r. appel, arthur van benthem, daniel g. garrett, itay goldstein, marius guenzel, sasha indarte, ivan t. ivanov …

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