Where Do Brown Companies Borrow From?


We study cost and sources of debt for companies with poor ESG performance. We find that, while both loan and bond financing are costlier for borrowers with poor ESG performance, “brown” firms face a lower extra premium for borrowing from banks than “green” firms. In addition, companies with poorer ESG performance obtain larger bank loans and borrow smaller amounts from the public bond market, gradually shifting their debt structure towards more bank-loan-heavy. We discuss multiple explanations for our findings: brown borrowers' financial risk, banks' superior information about their borrowers, public debt holders' inherent preference for high ESG performance firms, and public debt holders being subject to stricter ESG regulation than banks.

Presented at: Trans-Atlantic Doctoral Conference*, Central Bank Research Association*, China International Conference in Finance, Alliance for Research on Corporate Sustainability UCLA Conference*, Northern Finance Association (scheduled)*

*denotes presentation by co-author

Mentioned by: Wharton ESG Initiative

Sergey Sarkisyan
Sergey Sarkisyan
Assistant Professor of Finance

My research interests include financial intermediation, monetary policy, and payment technologies