Corporate Sustainability Performance and Bank Loan Pricing: It Pays to Be Good, But Only When Banks are Too

Hauptmann, Clarissa (2017) Corporate Sustainability Performance and Bank Loan Pricing: It Pays to Be Good, But Only When Banks are Too. Saïd Business School Working Paper 2017-20.

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This study examines if and under which conditions corporate sustainability performance is reflected in bank loan prices. By taking the sustainability performance of the lending bank into account, I show that borrowers with strong sustainability performance pay lower loan spreads than borrowers with weak sustainability performance, however only when the lending bank exhibits strong sustainability performance. The findings hold across various methodological approaches including sample splits, interaction effects, propensity score matching, within-firm and within-bank differences and while controlling for a wide range of possible confounding effects. The setting allows for a novel analysis of differences within the same borrowers across different banks as well as banks with different borrowers. I discuss three explanatory mechanisms for the relationship: improved credit risk, increase in trust due to similarity between banks and borrowers, and reputation risk. The study reveals that the relationship between sustainability performance and loan prices is driven by a premium in loan spreads for borrowers with weak sustainability performance, rather than a spread discount for strong sustainability performance. I document that the results are not driven by measurement error or selection of borrowers to banks. Consistent with the notion that the availability of sustainability information and scrutiny have been increasing, the results of this study reveal that the relationship between borrower sustainability performance and loan pricing is stronger in more recent years

Item Type: Oxford Saïd Research Paper
Keywords: loan pricing, syndicated loans, sustainability, corporate social responsibility
Date Deposited: 08 Nov 2017 16:23
Last Modified: 08 Nov 2017 16:23

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