Bauer and Hann (2010)

Bauer, Rob and Daniel Hann.  “Corporate Environmental Management and Credit Risk.”  Working paper (Maastricht University), December 2010.

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.

LK comment:  Won 2010 Moskowitz Prize.

Link (working paper):  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1660470