The impact of environmental performance on firm’s defaultThe mediating role of stranded assets and innovation

Resumen

The structural economic change taking place in the EU during the transition to become carbon neutral by 2050 is a challenge for firms. The increasingly stringent regulation and the required technological change in a context of environmental demands by the firm’s stakeholders and the civil society may compromise the viability of high carbon emitters. This study analyzes the impact of environmental performance on the firm’s default risk and estimates the moderating effect of firms’ stranded assets and innovation activities on this relationship. Considering listed firmsfrom 16 European countries overthe 2005-2018 period, ourresultsindicate that firms with better carbon performance show a higher distance to default. This firm’s default risk is lower when tangibility decreases and the firm has an active role in innovation activities, being these effects amplified for good carbon performers. Our results are robust to the use of alternative by-firm proxies for stranded assets and innovation.