Greenwashing and Bank Loan Contracting: Does Environmental Disclosure Quality Matter to Creditors?

Abstract

We provide novel evidence on the nexus between a firm’s symbolic environmental disclosure to present an overly responsible public image, i.e., greenwashing, and the structure and design of its bank-loan contracts. Our evidence indicates that while greenwashing is associated with lower loan spread, creditors use a complex contract design rather than a single price measure to extract an appropriate expected return from greenwashing firms. Specifically, lenders appear to charge higher fees and employ stricter non-price contract terms to upend the impact of lower spread on their bottom line. Our findings highlight a unique mechanism through which the superior monitoring and information processing capabilities of private lenders could be deployed as a governance mechanism to guard against greenwashing without stifling firms’ external financial access.