Is Environmental Performance a Determinant of Bond Pricing? Evidence from the U.S. Pulp and Paper and Chemical Industries

47 Pages Posted: 13 Nov 2008 Last revised: 13 Feb 2014

Date Written: July 12, 2010

Abstract

In this study I provide evidence that there is an economically significant relation between a firm’s environmental performance and its bond yields. Firms that have poor environmental performance will face future environmental liabilities related to compliance and clean-up costs due to increasingly strict environmental laws and regulations. These liabilities are large enough to drive polluting firms into bankruptcy and can leave bondholders’ claims subordinate to environmental liabilities. I also find evidence that the relation between environmental performance and bond yields fades as bond quality increases, which is consistent with the non-linear pay-off structure of bonds. This study focuses on two of the most polluting industries in the U.S., chemical and pulp and paper. The paper’s findings support ongoing calls for greater cooperation between the Securities and Exchange Commission (SEC) and the U.S. Environmental Protection Agency (EPA), which would allow for the reporting of quantifiable environmental information in firms’ disclosures. It also provides evidence of environmental performance as a determinant of bankruptcy risk. Bankruptcy due to a history of poor environmental performance often leaves the related environmental liabilities underfunded. Many regulators are required to ensure adequate funds are available for remediation to match ongoing environmental degradation. Thus, the interplay between a firm’s bankruptcy risk and its environmental performance has broad implications.

Keywords: environmental accounting, bond yield, bond pricing, toxic release inventory, environmental performance

JEL Classification: M40, M49

Suggested Citation

Schneider, Thomas Ervin, Is Environmental Performance a Determinant of Bond Pricing? Evidence from the U.S. Pulp and Paper and Chemical Industries (July 12, 2010). Available at SSRN: https://ssrn.com/abstract=1299761 or http://dx.doi.org/10.2139/ssrn.1299761

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
544
Abstract Views
2,165
rank
70,300
PlumX Metrics