Corporate Sustainability in the Estimation of Financial Distress Likelihood –Evidence from the World Stock Markets during the Financial Crisis

Abstract

This paper investigates the relationship between corporate sustainability as measured by GES ratings and the financial distress likelihood during the period 2003 to 2010. We find that corporate sustainability in both the environmental and social dimension is associated with a lower probability of financial distress. The theoretical explanations for our findings are based on two pillars. First, corporate sustainability, in particular the environmental dimension, is supposed to have a positive effect on firms’ cash flows due to increased cost efficiency and revenues from green customers. Second, corporate sustainability, in particular the social dimension, might serve as an effective risk management tool that lowers stakeholder risks.

Keywords: Corporate sustainability, financial distress likelihood, logistic regression, panel data analysis