Creditor Control of Environmental Activity: The Role of Liquidation Value

Abstract

I study the impact of creditor control on pollution activity, focusing on the role of liquidation value. My setting exploits a law change that protects property purchasers from environmental cleanup liabilities. Using a triple-difference design and financial covenant violation to proxy for creditor control, I find that violating firms increase ground pollution by 14-25% when purchasing liability is reduced. The impact is stronger for firms with more financing friction and firms closer to default. These findings suggest reducing pollution's effect on asset value disincentivizes creditors to discipline their borrower's environmental behavior. Overall, my results indicate that the market for corporate assets has important implications on how creditors affect corporate environmental outcomes.