Environmental controversies, environmental fines and firms’ default risk

This paper aims to provide empirical evidence on the unexplored relationship between environmental controversies, environmental fines, and firms' default risk, as well as to test whether this relationship changes with firms' level of environmental commitment or the country's environmental awareness. Using a sample of 402 global firms over ten years, we show that an increase in environmental controversies, and thus greater media exposure of firms for environmental damage, increases firms' risk of default. Instead, environmental fines do not significantly influence default risk. Our results also point out that the effect of environmental controversies on default risk is heterogeneous: it is significant exclusively for firms with a higher environmental commitment to reducing carbon emissions and headquartered in countries with greater environmental attention. Our results present several implications for firms, policymakers, and financial institutions. • Environmental controversies (ECs) refer to firms' negative impacts on the environment. • ECs significantly increase default risk. • Environmental fines (EFs) do not significantly impact default risk. • The effect of ECs is exclusive for firms committed in reducing carbon emissions. • ECs do not impact firms headquartered in countries with low environmental awareness.