Listing on environmental, social and governance index and financial distress: does the difference-in-differences matter?

Abstract

Purpose

Environmental, social and governance (ESG) issues have become the cornerstone of investment decisions in firms today. With that, publicly traded ESG indices (like the BSE ESG 100 index in India) have come into existence. The existing literature signifies that ESG generates financial implications and induces stability. The current study aims to test whether the firms listed on the ESG index (ESG-sensitive firms) face less financial distress than those not listed on such an index.

Design/methodology/approach

The study applies panel data difference-in-differences (DID) regression by considering ESG as an unstaggered treatment to 74 non-financial firms listed on India's Bombay Stock Exchanges (BSE) 100 index. In total, 42 firms are ESG treated as they got listed on the BSE ESG 100 index, formed in 2017. The remaining 32 firms form the control group. The confidence intervals and standard errors are estimated using clustered robust errors and the Donald and Lang method.

Findings

Listing on the ESG index matters for financial stability; differences in financial distress are significant on financial distress. ESG-sensitive firms face less financial distress than non-ESG firms (or firms not perceived as ESG-sensitive). The results are consistent across two financial distress measures, Altman z-scores for emerged and emerging markets. Thus, the DID in distress status between ESG-sensitive and non-ESG firms matter.

Practical implications

The study creates vibrant implications for practitioners using ESG to reduce financial distress.

Originality/value

The study is one of its kind to test the treatment effects of ESG on firm value and quantify treatment effects on financial distress.

Citation

Singh, K. (2024), "Listing on environmental, social and governance index and financial distress: does the difference-in-differences matter?", Asian Review of Accounting, Vol. 32 No. 2, pp. 302-326. https://doi.org/10.1108/ARA-07-2023-0197