LAUSR

Abstract This study examines the impact of a firm’s polluting activities (measured as environmental inefficiency) on the firm’s bond credit rating. We posit that firms with excessive polluting activities (i.e., a high level of environmental inefficiency) receive low bond ratings because prior research links pollution reduction to better firm performance and outcomes. Using a 29-year panel sample with 4969 firm-year observations (representing 310 unique firms) from 1987 to 2015, we find a significant negative relation between environmental inefficiency and bond ratings. Our results still hold after a battery of robustness checks. In addition, we find that our results are largely driven by firms that are not near a broad bond rating change (i.e., firms without a plus or minus specification in their bond ratings).