Does ESG Performance Reduce Bankruptcy Risk?

Bei Gao, Haodong Liu, Shenghui Tong () and Yanbo Jin
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Bei Gao: School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China
Haodong Liu: School of Economics and Finance, Xi’an Jiaotong University, Xi’an 710049, China
Shenghui Tong: Department of Finance, School of Business, Siena University, Loudonville, NY 12211, USA
Yanbo Jin: Department of Finance, Financial Planning, and Insurance, David Nazarian College of Business and Economics, California State University, Northridge, CA 91330, USA

IJFS, 2025, vol. 13, issue 4, 1-30

Abstract: This study examines how environmental, social, and governance (ESG) performance affects firms’ bankruptcy risk and explores the mechanisms linking ESG engagement to financial stability. Using a panel dataset of Chinese-listed firms from 2009 to 2022, we employ multivariate regression analyses, instrumental variable estimation, and robustness tests to address potential endogeneity. The results indicate that higher ESG performance significantly reduces bankruptcy risk. Mechanism analyses reveal that ESG engagement lowers bankruptcy risk by improving information transparency, alleviating financing constraints, enhancing operating performance, and reducing leverage. The effect is more pronounced for non-state-owned enterprises, firms in economically developed regions, highly competitive industries, and those in the growth and maturity stages. Among the three ESG pillars, corporate governance exerts the strongest influence on mitigating bankruptcy risk. These findings provide new evidence from an emerging market and offer important implications for sustainable corporate finance and risk management.

Keywords: ESG performance; bankruptcy risk; corporate governance; China (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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