Secured Debt and Clean Firms: The Green Effects of Creditor Rights

We examine whether enhanced access to secured debt improves corporate environmental performance by exploiting staggered anti-recharacterization (AR) laws that strengthen creditors’ rights to repossess collateral in bankruptcy. These laws reduce legal uncertainty around asset transfers to Special Purpose Vehicles (SPVs), thereby expanding firms’ capacity to raise secured debt. Using EPA TRI data from 1993–2015 and a difference-in-differences design, we find that AR law adoption leads to a 9% reduction in toxic emissions and a 2% decrease in EPA violations at treated firms. The effects are more pronounced among firms with high cash flow volatility and elevated environmental litigation risk. Mechanism tests show that treated firms increase environmental expenditures, invest more in pollution abatement and green innovations, and improve environmental management systems. Notably, AR laws spur the use of SPVs, which facilitate bankruptcy-remote financing structures and enhance collateral pledgeability. Our findings reveal a novel debt-pollution channel: stable and secured debt financing promotes corporate commitment to environmental protection.