Abstract
We find that firms release more toxics to the environment after they issue debt. The causal effect of debt financing on corporate pollution is supported by multiple identification strategies including the branching law change and the introduction of credit default swaps. The effect of credit on pollution is more pronounced for firms under greater debt repayment pressure, especially from bank lenders. We also show that green banks help curb pollution as the credit-pollution relationship is weaker for firms borrowing from green banks. Overall, our findings suggest that traditional debt usage is associated with a higher pollution level. Firms may sacrifice the environment to generate short-term profits to repay their debt. Environment-friendly financial instruments such as green loans or green bonds can be useful to curb pollution.
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