Do business strategies and environmental, social, and governance (ESG) performance mitigate the likelihood of financial distress? A multiple mediation model

Abstract

This study explores the connection between business strategies, ESG performance, and the probability of bankruptcy. Using a sample comprising 1970 U.S. firm-year observations from 2016 to 2020, this study adopts several techniques to achieve its goals, including the partial least squares structural equation modeling (PLS-SEM) algorithm and additional analyses. The results demonstrate that a firm with a better cost leadership strategy has higher ESG performance. A sound cost leadership strategy and ESG performance negatively influence a firm’s likelihood of financial distress. Using a mediating analysis model, we also find that financial and ESG performance mediate and mitigate the probability of experiencing financial distress through a cost leadership strategy, indicating that these are essential factors that cannot be ignored when mitigating bankruptcy probability. Financial performance also mediates and mitigates the probability of experiencing financial distress through the ESG path. This study adds to the existing body of knowledge by revealing the role of sound business strategies and ESG performance in mitigating the likelihood of financial distress, an under-explored topic. It also analyzes the mediation roles of financial and ESG performance to provide significant insights to companies' decision-makers in order to support them in their endeavors toward performance improvement and achieving best practices.