Environmental Liabilities, Creditors, and Corporate Pollution: Evidence from the Apex Oil Ruling
We evaluate the impact of the 2008 Apex Oil court decision that made the creditors of some corporations financially liable for the environmental damages caused by specific pollutants. Apex reduced the circumstances under which environmental liabilities were dischargeable in Chapter 11, which generated financial incentives for the creditors of firms near bankruptcy to pressure their firms to reduce emissions of those pollutants. We discover that Apex lowered bond prices, widened loan spreads, and reduced corporate pollution among firms that (a) release the specific chemicals covered by Apex and (b) are close to Chapter 11 and hence likely to be affected by changes to the dischargeability of environmental liabilities. Further tests suggest that creditors rapidly responded to Apex and successfully induced firms to reduce pollution.
We thank the valuable comments from Dyaran Bansraj, Taehyun Kim, Jongsub Lee, Kyoungwon Seo, Francesc Rodriguez Tous, and seminar participants at City University of London, National Taiwan University and Seoul National University. We also thank Wan-Chien Chiu for her assistance in processing bank loan data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.