Do environmental, social, and governance practices affect financial distress and performance? Evidence from Latin American firms
DOI:
https://doi.org/10.1590/1808-057x20262372.enKeywords:
environmental, social, and governance, financial distress, firm performance, Latin AmericaAbstract
This study examines the impact of environmental, social, and governance (ESG) performance and its three pillars on
financial distress (FD) in Latin American firms from 2011 to 2022. It also investigates whether the interaction between ESG
performance and FD affects firm performance (return on assets [ROA]). The existing literature shows important limitations
in understanding the relationship between ESG practices and FD. Although some studies have examined these constructs
separately, empirical evidence integrating both remains scarce, particularly in emerging economies. Moreover, no studies
were identified that simultaneously analyze these effects within the Latin American context, revealing a substantial gap that
this research aims to address. We employ a multilevel regression model estimated by maximum likelihood (ML), using a
sample of 963 firms, comprising 11,724 firm-year observations. This approach allows us to control for firm-specific, countryspecific, and temporal effects, providing robust evidence on the ESG, FD, and performance nexus. Findings indicate that
ESG is positively associated with FD in models excluding lagged FD, but this relationship becomes negative when lagged
FD is included, a pattern consistent across all ESG pillars. While ESG positively affects ROA, this relationship reverses when
interacting with FD, reflecting the short-term costs and long-term benefits of ESG adoption. This study contributes to the
literature by demonstrating how ESG practices influence FD and firm performance in emerging markets. It provides valuable
guidance for managers, investors, creditors, regulators, and other stakeholders, showing that ESG investments can reduce
financial vulnerability, improve access to cheaper financing, and enhance corporate reputation. The findings underscore the
strategic role of ESG as a tool for risk mitigation and long-term value creation in Latin American firms.
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