Corporate environmental management and credit risk

Abstract

corporate environmental management and credit risk rob bauer and daniel hann* maastricht university european centre for corporate engagement (ecce) this version: june 30, 2010 abstract this study analyzes environmental management and its implications for bond investors. poor environmental practices influence the credit standing of borrowing firms through the legal, reputational, and regulatory risks associated with environmental incidents. we devise environmental performance measures based on information from an independent rating agency, and provide evidence that these measures explain the cross-sectional variation in credit risk for a sample of 582 u.s. public corporations between 1995 and 2006. our findings suggest that firms with environmental concerns pay a premium on their cost of debt financing and are assigned lower credit ratings. in contrast, firms with proactive environmental engagement benefit from a lower cost of debt financing. the results are robust to numerous controls for company and bond specific characteristics, alternative model specifications, and industry membership. key words: environmental risk management, cost of debt, credit ratings, litigation, regulatory risk, reputation risk, climate change jel classification: g32; g33; q51; q56; m49; k32 we are grateful for the valuable comments and suggestions by jeroen derwall, nadja guenster, marcin kacperczyk, samuel lee, and the participants of the nyu stern corporate governance luncheon. we thank the …

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