Corporate environmental responsibility and default risk: Evidence from China

We use a novel and comprehensive dataset to investigate the influence of corporate environmental responsibility on the default risk of listed firms in China. We document a significant and negative impact of environmental performance on a firm's default risk. We use instrumental variables regressions and placebo tests to address endogeneity concerns and document consistent results. Further, we conduct cross-sectional analysis and find a strong negative influence of environmental performance on default risk in firms with high systematic risk, weak fundamentals, severe pollution, and high energy consumption, supporting volatility and environmental regulation uncertainty channels. Our findings reveal the externality of corporate environmental responsibility on a firm's financial risk profile. • Use a novel and comprehensive dataset about corporate environmental responsibility(CES) in China. • Document a negative impact of environmental performance on the default risk of afirm. • Employ IV approach and placebo test to address endogeneity concern and establishcausality. • Cross-sectional analysis supports volatlity and environmental regulation uncertaintychannels. • Reveal the externality of CES on firm's financial risk profile.