Journal
REVIEW OF FINANCIAL STUDIES
Volume 35, Issue 7, Pages 3373-3417Publisher
OXFORD UNIV PRESS INC
DOI: 10.1093/rfs/hhab125
Keywords
G21; G28; G38
Categories
Funding
- Fordham Social Innovation Fellowship
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This study reveals the positive effect of banking relationships on corporate environmental, social, and governance (ESG) policies. The research shows that banks are more inclined to grant loans to borrowers with similar ESG profiles and positively influence their subsequent ESG performance, especially when banks have better ESG ratings than borrowers and borrowers are highly dependent on banks. The study also highlights the significance of the bank's ESG rating on borrowers' ESG behavior.
We show that banking relationships promote corporate environmental, social, and governance (ESG) policies. Specifically, banks are more likely to grant loans to borrowers with ESG profiles similar to their own and positively influence the borrower's subsequent ESG performance. Their influence is more pronounced when (1) banks have significantly better ESG ratings than borrowers and (2) borrowers are bank dependent. We exploit M&A among lenders as a source of quasi-exogenous variation in the lender's ESG standard to alleviate endogeneity concerns. Overall, our study presents the first evidence on the interplay between responsible bank lending and borrowers' ESG behavior.
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