Environmental, social and governance disclosure and default risk. (14th June 2021)

• Record Type: Journal Article
• Authors: Atif, Muhammad; Ali, Searat
• Is Part Of: Business strategy and the environment. Volume 30:Number 8(2021)
• Page Start: 3937
• Page End: 3959
• Publication Date: 2021-06-14
• Subjects: corporate life cycle -- cost of debt -- default risk -- ESG disclosure -- performance variability; Industrial management -- Environmental aspects -- Periodicals; Industries -- Environmental aspects -- Periodicals; 658.4083
• DOI: 10.1002/bse.2850
• Languages: English
• ISSNs: 0964-4733

Abstract

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.