Corporate Default Risk and Environmental Deterioration (International Evidence)

Abstract This study explores the impact of corporate default risk on environmental deterioration in the international context. We find that corporate bankruptcy is positively associated with CO2 emissions and its decomposed components. These findings are reliable in low-income and highly uncertain countries but weak in countries having more market competition. We also find that the negative impact of corporate default risk on environment is more robust in countries with more population density and less forest area thresholds. Using instrumental variable approach, we provide preliminary evidence that firm-level political risk (for U.S. and Canadian firms only) tend to increase corporate default risk leading to degrading environment. Our research will help environmental authorities to consider corporate-default risk as a determinant when formulating environmental-related strategies.