Environmental, social and governance disclosure and default risk

Muhammad Atif*, Searat Ali

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate whether environmental, social and governance (ESG) disclosure is related to default risk. Using a sample of US nonfinancial institutions from 2006 to 2017, we find that ESG disclosure is positively related to Merton's distance to default and is negatively related to the credit default swap spread, which suggests that firms with a higher ESG disclosure have lower default risk. Our analysis further indicates that the inverse effect of ESG disclosure on default risk is through increased profitability and reduced performance variability and cost of debt. We also document that the negative impact of ESG disclosure on default risk is existent only for mature and older firms. These results are important for all stakeholders of firms, including shareholders and bondholders to consider firm's ESG disclosure in conjunction with life cycle stage before making their investment decisions.
Original languageEnglish
Number of pages23
JournalBusiness Strategy and the Environment
Early online date14 Jun 2021
DOIs
Publication statusE-pub ahead of print - 14 Jun 2021

Keywords

  • corporate life cycle
  • cost of debt
  • default risk
  • ESG disclosure
  • performance variability

Fingerprint

Dive into the research topics of 'Environmental, social and governance disclosure and default risk'. Together they form a unique fingerprint.

Cite this