Banks vs. markets : Are banks more effective in facilitating sustainability?

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Title: Banks vs. markets : Are banks more effective in facilitating sustainability?
Author: Newton, David P. ; Ongena, Steven ; Xie, Ru ; Zhao, Binru
Organization: Bank of Finland
Department / Unit: Bank of Finland Institute for Emerging Economies (BOFIT)
Series: BOFIT Discussion Papers
Series number: 5/2022
Year of publication: 2022
Publication date: 27.4.2022
Pages: 44
Subject (yso): yritykset; rahoitus; riskit; kestävä kehitys; monitorointi; luotot; luotonanto; pankit; joukkovelkakirjat
Keywords: Bofit-kokoelma; kestävä rahoitus; ESG
JEL: G20; G21; G30; G32
Other keywords: ESG risk; debt structure; capital structure; debt choices; bank monitoring
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.

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