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Environmental, social and governance disclosure and default risk

Journal Article


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.

Publication Date


  • 2021

Citation


  • Atif, M., & Ali, S. (2021). Environmental, social and governance disclosure and default risk. Business Strategy and the Environment, 30(8), 3937-3959. doi:10.1002/bse.2850

Scopus Eid


  • 2-s2.0-85107817089

Start Page


  • 3937

End Page


  • 3959

Volume


  • 30

Issue


  • 8

Place Of Publication


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.

Publication Date


  • 2021

Citation


  • Atif, M., & Ali, S. (2021). Environmental, social and governance disclosure and default risk. Business Strategy and the Environment, 30(8), 3937-3959. doi:10.1002/bse.2850

Scopus Eid


  • 2-s2.0-85107817089

Start Page


  • 3937

End Page


  • 3959

Volume


  • 30

Issue


  • 8

Place Of Publication