ESG Performance and Probability of Default

Sammanfattning: This study aims to investigate how firms' ESG performance affects their probability of default for Nordic listed firms. Based on stakeholder theory as well as findings from previous literature, we hypothesise that this relationship is negative as our main hypothesis. In addition, a subhypothesis for Swedish listed firms with the same negative relationship is formulated. To test this, we use the probability of default calculated by Altman's Z''-Score LR (logistic regression) model as the dependent variable, and the ESG score from Refinitiv Eikon as the main independent variable. When applying all control variables, where firm size is the most important, ESG is non-significant for the Nordic and Swedish listed firms. However, the relationship is negative and significant for larger Nordic firms. For the full sample we conclude two possible explanations of the results: 1) ESG performance does not significantly affect probability of default for firms in countries where general ESG performance is high and corruption is low, 2) ESG score as a proxy is not fully representative of stakeholder value. For larger firms, we conclude that ESG negatively relates to probability of default likely due to the benefits of higher ESG performance outweighing the financial costs induced to achieve higher ESG performance, which is not the case for smaller firms.