Energy uncertainty and corporate bankruptcy risk: International evidence

The growing concern over energy security has raised critical questions about the role of energy uncertainty in shaping firm-level outcomes. While prior research underscores the importance of energy uncertainty, there is limited understanding of its impact on corporate bankruptcy risk, particularly in a cross-country context. This paper presents the first empirical evidence of the relationship between energy uncertainty and corporate bankruptcy risk using a sample of listed firms from 28 countries. The findings reveal that energy uncertainty escalates bankruptcy risk, which is consistent with resource dependency, agency and pecking order theories. Contracting profit margins and surging cost of debt are two intervening mechanisms through which energy uncertainty adversely impacts bankruptcy risk, indicating that heightened costs associated with operating and financing activities inflates financial distress. We also unveil that a conservative working capital policy and superior working capital efficiency diminish the detrimental impact of energy uncertainty. Our sub-sample analyses divulges that this detrimental impact is stronger in firms operating in high energy-consuming and cyclical sectors, and in those based in energy exporting and high energy-intensity countries. Furthermore, at low levels of energy uncertainty, firms effectively curtail bankruptcy risk by executing risk management measures whereas such measures are ineffective when energy uncertainty surpasses a threshold at ∼25th percentile. Our baseline result remains unchanged on employing several robustness checks. Overall, this study yields crucial insights and suggestions for corporate managers, regulators and policymakers to navigate energy shocks and to enhance firm resilience through strategic planning and decision-making.