The Impact of Corporate ESG Performance on Debt Default Risk: Evidence From China

Focusing on Chinese stock market, this paper extends previous research on the relationship between environmental, social, and governance (ESG) performance and corporate default risk. Based on a sample of 1718 nonfinancial listed companies over the period from 2013 to 2022, we find that ESG performance is positively related to Z China − score, which suggests that superior performance on ESG strategies leads to lower default risk. Moreover, we test the three individual components of ESG and find that social and governance components are significantly negatively related to default risk. We hypothesize that reduced default risk can be attributed to (1) increased transparency and information quality and (2) lower financial constraints and cost of debt. Our findings remain consistent and robust when using alternative proxies and alternative estimation methods. These results have significant implications for companies, investors, and policymakers who aim to reduce default risk by implementing sustainability initiatives.