ESG performance and financial distress during COVID-19: the moderating effects of innovation and capital intensity

Abstract

PurposeThis study examines the relationship between Environmental, Social and Governance (ESG) practices and financial distress in times of uncertainty.Design/methodology/approachThomson Reuters ESG database, Compustat and Center for Research in Security Prices (CRSP) were used to derive a final sample size of 1,572 firms and 11,618 firm-year observations from 2003 to 2022. Fixed-effects regression was used to analyze the data.FindingsIt was found that increasing ESG involvement leads to an increase in Z score (i.e. lower financial distress), and this impact was more profound during the COVID-19 period and also when firms' innovativeness increased. However, during the COVID-19 period, increases in capital expenditures weaken the positive effect of ESG on financial distress.Research limitations/implicationsThis study contributes to the growing body of literature on the impact of ESG performance on financial distress and the nature of this relationship during times of uncertainty such as COVID-19.Practical implicationsThis study offers insights to managers and practitioners when developing their corporate financial strategies, particularly financial distress management, showing the potential benefits of innovativeness and capital intensity during turbulent times similar to COVID-19.Originality/valueLittle knowledge exists on how ESG engagement helps weather financial distress during periods of uncertainty due to external shocks (e.g. COVID-19). This paper looks at the effect of ESG engagement on financial distress and how capital intensity and innovativeness could influence this relationship while giving fresh insights into the impact of COVID-19.