The Impact of Corporate Environmental Misconduct on Bond Issues and Seasoned Equity Offerings

Abstract

We investigate to what extent U.S. companies fined by the Environmental Protection Agency (EPA) are penalized by investors when those firms issue corporate bonds or equity after an environmental violation. Our results show higher spreads for debt issues and higher price discounts in seasoned equity offerings (SEOs) when firms raise capital right after the fine imposed by the EPA. However, economically, the effect on debt is significantly lower than on equity. While for debt issues, the spread is 10% higher for fined firms, for SEOs, the price discount is almost 120% larger. Consistent with the effect of environmental misconduct on financing costs, we also find that the probability of issuing new debt by fined firms increases while the probability of issuing equity decreases significantly. Our results suggest that fined firms can afford the higher cost of new debt but not the higher cost of raising new equity. Moreover, our cross-sectional tests support our baseline results as we find higher issuing costs in polluting industries. Besides, we identify differential effects for financially constrained and opaque firms.