Binru Zhao (University of Bath) - Bank vs. Market: Are Banks More Effective in Facilitating Sustainability?

Binru Zhao (University of Bath) - Bank vs. Market: Are Banks More Effective in Facilitating Sustainability?

Co-authors: David Newton (University of Bath), Steven Ongena (University of Zurich) and Ru Xie (University of Bath)

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 bank borrowing but increases after bond issuance, suggesting that banks are more effective than public bond markets in shaping borrowers' ESG performance.

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