ESG rating and default risk: Evidence from China

Abstract

Based on the data of Chinese A-share listed companies from 2009 to 2022, this study constructs a bivariate panel vector autoregression (PVAR) model to examine the dynamic equilibrium relationship between default risk and environmental, social, and governance (ESG) performance and its individual dimensions. Results indicate that ESG performance and corporate stability exhibit growth inertia and self-reinforcing mechanisms, with overall ESG performance significantly mitigating default risk. Although no bidirectional causality was found between environmental and governance performance and default risk, corporate stability positively impacts both over time. The findings indicate a synergistic relationship between social performance and default risk, in which strong social performance helps mitigate default risk. Financial stability encourages companies to engage in social responsibility initiatives. Heterogeneity analysis demonstrates that the mitigating effects of ESG performance on default risk are more pronounced for non-state-owned enterprises (non-SOEs) and small- and medium-sized enterprises (SMEs). Social responsibility and corporate governance are more significant in enhancing financial stability in manufacturing firms. These findings provide valuable insights for investors and policymakers in mitigating default risks while promoting the development of green finance.