Corporate Environmental Liabilities and Capital Structure

Abstract

We investigate the capital structure implications of corporate environmental liabilities, which are measured using the amount of toxic production-related waste produced by firms. We document that firms with higher environmental liabilities maintain lower debt-to-assets ratios, suggesting that environmental liabilities work as a substitute for financial liabilities. The substitution effect is more pronounced for firms that are larger, followed by more financial analysts, more reliant on principal customers, or more subject to community concerns. Further analyses show that ceteris paribus, less environmentally responsible firms have a lower fraction of bank debt in total debt, consistent with the notion that banks are more environmentally sensitive than other lenders. Overall, our findings imply that being environmentally responsible can enhance a firm’s debt capacity and improve its access to bank credit.

Keywords: corporate social responsibility, corporate environmental responsibility, environmental liability, capital structure, debt structure

JEL Classification: G32, L11