Does ESG performance influence a firm's probability of default?
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School of Business |
Master's thesis
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Authors
Date
2021
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
42+1
Series
Abstract
This thesis investigates the effects of engagement in ESG (environmental, social, governance) activities on the probability of default by using data from 423 non-financial public European firms between 2000 and 2019. The probability of default proxy is calculated by using the structural model of Merton’s distance-to-default and the measures for ESG Score and ESG Controversies score are obtained from the Refinitiv database. ESG Score is calculated by Refinitiv based on the data provided by each company and compared to peers, while ESG Controversies score is based on controversial ESG events’ information collected by Refinitiv from public media. The statistically significant results support one of the hypotheses that firms with higher ESG scores experience a higher probability of default, while either unobserved firm-related or year-related variables are being fixed. There was no significant evidence found to support the opposite hypothesis that higher ESG scores are negatively related to the probability of default. Another hypothesis that firms with higher ESG Controversies scores have a lower probability of default is also supported by the results of this thesis.Description
Thesis advisor
Lof, MatthijsKeywords
ESG, ESG policies, risk of default, probability of default