The impact of ESG disclosure on mitigating financial distress: exploring the moderating role of firm life cycle

Abstract

Globally, businesses are increasingly gaining recognition for their non-financial performance due to heightened stakeholder demands about ethical and environmental responsibilities. This noteworthy shift in perspective has catalyzed the inception of this research, which seeks to scrutinize the influence of environmental, social, and governance disclosure (ESGD) on financial distress. To investigate the potential capacity of ESGD in mitigating financial distress, the researchers have employed the Generalized Method of Moments. Additionally, the study takes into account the moderating role played by the firm’s life cycle in this relationship. The findings underscore that the adoption of ESGD is associated with a decreased likelihood of default, thus highlighting its effectiveness as a risk management strategy. Moreover, this investigation emphasizes the impact of the firm’s life cycle on the link between ESGD and corporate financial distress. Rooted in signalling theory as the theoretical framework, the research posits that a wide spectrum of Environmental, Social, and Governance (ESG) initiatives not only enhances the consistency of signals but also amplifies the associated signal costs. Consequently, in alignment with this theoretical perspective and substantiated by empirical evidence, our study confirms a multifaceted influence of ESGD on financial distress, contingent upon the distinctive phases of a firm's life cycle. In consequence, this study offers valuable insights for managerial decision-making, guiding the development of tailored disclosure policies that align with the specific characteristics of a firm’s life cycle. © The Author(s), under exclusive licence to Springer Nature Limited 2024.