Environmental Pollution and Corporate Credit Spreads

This paper studies the impact of industrial pollution on credit risk using transaction data on U.S. corporate bonds. We find that changes in pollution intensity are significantly and positively associated with changes in credit spreads, a relationship that remains robust after controlling for climate change exposure and carbon intensity, and addressing endogeneity through two complementary instrumental variable strategies. The effect is driven primarily by changes in risk premiums rather than expected default losses and is more pronounced for firms facing greater financial constraints, higher ownership by bond investors, and weaker regulatory oversight. These results highlight the importance of corporate environmental policies in influencing borrowing costs by shaping bond investors’ assessments of regulatory risk.