Bank Liquidity, Credit Supply, and the Environment
We evaluate the impact of the credit conditions facing corporations on their emissions of toxic air pollutants. Exploiting cross-county, cross-time shale discoveries that generated liquidity windfalls at local bank branches, we construct measures of (1) the degree to which banks in non-shale counties, i.e., counties where shale was not discovered, receive liquidity shocks through their branches in shale counties and (2) the degree to which a corporation in a non-shale county has a relationship lender that receives liquidity shocks through its branches. From both the county- and firm-level analyses, we discover that positive shocks to credit conditions reduce corporate pollution.
Chen Lin acknowledges financial support from the Center of Financial Innovation and Development and the Seed Funding for Strategic Interdisciplinary Research at Hong Kong University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.