Environment court, shareholder conflict and corporate governance: evidence from market reactions to bank loan announcements

Abstract

Purpose

This paper aims to investigate the impact of environmental risk on corporate governance through market reaction to bank loan announcements.

Design/methodology/approach

Using the establishment of environment court in China as a quasi-natural experiment, this paper adopt the difference-in-differences approach based on listed firms during 2003–2013 to explore the impact of environment court on corporate governance.

Findings

This paper find that the environment court would weaken the cumulative abnormal return of loan announcements. Then, this paper confirm that the potential reason is that environment court worsens the interest conflict between majority and minority shareholders. Further, cross-sectional analysis suggests that bank’s supervision, market competition and analyst coverage can alleviate the impact of environment court on corporate governance.

Practical implications

Environment courts intensify firms’ internal interest disputes, thus causing the decrease of corporate governance, which can be observed through the effect of bank loan announcements.

Social implications

This paper provide reference for environmental policy formulation and implementation, firms’ decision-makings and improving the banking regulatory system.

Originality/value

This paper makes a contribution to the studies about the impact of environment court on firms’ decision-making and investors’ reaction, the impact of external factors on corporate governance and bank loan announcements effect.