Creditor Control of Environmental Activity : The Role of Liquidation Value

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 violations to proxy for creditor control, I find that firms that violate a financial covenant increase ground pollution by 13-26 percent when purchasing liability is reduced. Evidence suggests this increase stems from the adoption of less effective abatement technology rather than increased production. These findings suggest reducing pollution’s effect on asset value disincentivizes creditors to monitor their borrower’s environmental behavior. Overall, my results indicate that the market for corporate assets has important implications on how creditors affect corporate environmental practices