The Spillover of Corporate ES on Cost of Debt

Abstract We apply a regression discontinuity design to investigate the causal impact of a firm’s E\&S risk on its peer firms’ cost of debt. Based on voting outcomes of close-call ES-related shareholder proposals in the US public firms’ annual shareholder meetings during 2005–2021, we find that the passage of ES-related proposals by a narrow margin leads to an increase in the all-in-drawn spread on corporate bank loans for peer firms in the next year. This spillover effect of raising the cost of debt is more pronounced for closer peers in terms of bank lender similarity, smaller and more financially constrained peers, or peers operating in a more competitive industry. Furthermore, we show that the spillover is driven by loans issued or led by banks that have positive environmental and social scores, and the spillover occurs when there is a high degree of tone misalignment between the proponent’s statement and the opponent’s statement associated with the proposal. Such evidence suggests banks’ information transmission works as the economic mechanism for the spillover. Our findings imply that banks learn about corporate E&S risks through their loan relations and reprice the peer firms’ corporate loans accordingly.