ESG and Firm's Default Risk

Abstract

• We investigate the implications of ESG practices of Chinese listed firms on their default risk. • Applying year-by-season and firm fixed effects, we find that higher ESG ratings mitigate firms’ default risk. • The mitigation effect increases as the term structure of default risk increases. • ESG rating's impact on firms’ default risk is smaller for manufacturing firms than non-manufacturing firms. We investigate the implications of ESG practices of Chinese listed firms on their default risk. We explore the relationship between default risk and ESG ratings. Applying year-by-season and firm fixed effects, we find that higher ESG ratings mitigate firms’ default risk. The mitigation effect increases as the term structure of default risk increases. We find that the magnitude of ESG rating's impact on firms’ default risk is smaller for manufacturing firms than non-manufacturing firms. Our findings suggest that credit markets well reflect the ESG practices of firms; investors may improve credit risk management by considering the ESG performances of firms.