Are environmental lawsuits related to the cost of bank loans?

Purpose: Considering the importance of environmental lawsuits in the capital market specifically and society more generally, the authors examine whether environmental lawsuits are related to the cost of bank loans for the first time.

Design/methodology/approach: This study uses a US sample of 7,684 loans from 1,409 individual borrowing firms over the 1995–2015 period. The hypothesis is tested using lagged data from the year before the start of a bank loan, and firm fixed effects panel regression analysis is applied to control for correlated omitted variable bias. To further address endogeneity concerns, the authors use a difference in differences analysis that exploits the Deepwater Horizon oil spill on April 20, 2010, to establish causality. Finally, the authors use the entropy balancing method as an additional endogeneity check.

Findings: The authors find a positive relationship between environmental lawsuits and firms' bank loan costs. The results are economically significant. In particular, a one standard deviation increase in environmental lawsuits is related to a 2.07 basis point increase in bank loan costs. The results are robust to various endogeneity checks. Cross-sectional analyses indicate that a poor information environment, weak corporate governance, and low corporate social responsibility (CSR) levels strengthen the positive relationship between environmental lawsuits and bank loan costs. Finally, additional analyses show that environmental lawsuits are significantly negatively related to the loan amount and maturity contract provisions.

Originality/value: The authors provide new empirical evidence that increasing understanding of the economic consequences of environmental lawsuits on bank loan costs.