Environmental, social and governance disclosure and default risk

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.

The effect of corporate environmental, social and governance disclosure on cash holdings: Life‐cycle perspective

“…Following prior studies (e.g., Atif & Ali, 2021; Cheng et al, 2014), we use Bloomberg's ESG score as an umbrella measure to assess the firm's ESG disclosure. ESG score ranges from 0.1 to 100, with high score indicating more transparency and disclosure.…”

“…Following prior studies (e.g., Atif & Ali, 2021;Cheng et al, 2014) Bloomberg ESG data set that fail to provide information (E, S and G scores) on the three factors. We then employ the ESG index ranging from 0 to 1, based on the average extent to which ESG scores are disclosed.…”

“…First, we contribute to the diverse literature on ESG disclosure, firm life cycle and corporate cash policy. There is a growing body of literature linking corporate policies with various stages of a firm's life cycle (e.g., Atif & Ali, 2021; Dickinson, 2011; Faff et al, 2016; Owen & Yawson, 2010). However, prior research into the influence of ESG disclosure on cash holdings as a firm progresses through the different phases of its life cycle has received scant attention in the literature.…”

“…in its life cycle, its structures, capabilities and strengths, strategies and cash flow unpredictability will vary. In line with life-cycle theory, prior studies investigate and confirm the significance of the firm life cycle in determining policies and decisions (Atif & Ali, 2021;DeAngelo et al, 2006;Faff et al, 2016;Grullon et al, 2002;Hasan & Habib, 2017). Given that firms at various phases of their life cycle adopt different financial policies and may have varying levels of governance mechanisms, it is plausible to expect that the effect of ESG disclosure on corporate cash holdings is likely to differ across the lifecycle stages.…”

Environmental, Social and Governance Performance: Continuous Improvement Matters

“…Ratings disclosed by third-party ESG rating providers such as Bloomberg, MSCI and Refinitiv (formerly known as Thomson Reuters) are informative a Woei Chyuan Wong, Abd Halim Ahmad, Shamsul Bahrain Mohamed-Arshad, Sabariah Nordin & Azira Abdul Adzis as they provide objective evaluation of firm's ESG performance that is difficult for public to observe. Previous studies on ESG rating disclosures by third-party rating providers are found to improve firm's performance (Buchanan et al, 2018;Sahut & Pasquini-Descomps, 2015;Wong et al, 2021), reduce default risk (Atif & Ali, 2021) and financial risk (Lee & Faff, 2009;Oikonomou et al, 2012).…”