Pollution and Credit Quality: Exploring the Relationship Between Environmental Pollution and Credit Ratings in US States

ABSTRACT Objectives This study aims to examine the impact of environmental pollution on the credit ratings of state governments, a relationship that has been understudied in previous studies. Methods We utilize S&P credit ratings and Toxics Release Inventory (TRI) dataset to examine the relationship between pollution and the credit ratings of state governments from 2000 to 2019 (20 years). To address endogeneity problems, specifically reverse causality or simultaneous bias, this article uses the control function method with instrumental variables. Results We find that environmental pollution negatively affects the credit ratings of state governments. Moreover, our study also finds that environmental pollution has a lag‐effect on state's credit ratings. Conclusions The findings expand the literature on credit ratings by providing empirical evidence that environmental pollution is an essential determinant in the state's credit ratings.