When Silence Is Golden: Greenwashing and the Cost of Private Debt

We provide robust evidence that a firm’s selective environmental disclosure to present an overly responsible public image, i.e., greenwashing, is associated with significant reduction in debt-service through lower loan spread. However, private creditors appear to deploy stricter non-price loan contract terms such as greater collateral and tougher covenants to mitigate the informational risk arising from borrowers’ greenwashing behaviors. Our findings highlight a unique mechanism through which the superior monitoring and information processing capabilities of private lenders could be deployed as a governance mechanism to guard against greenwashing without stifling firms’ external financial access.