Does ESG implementation reduce bankruptcy risk of manufacturing and non-manufacturing firms? Evidence from dynamic panel threshold model

ESG is currently a hot topic of global discussion. However, research focusing on the relationship between ESG and bankruptcy risk is still limited. In recent years, there have been frequent firm bankruptcy incidents worldwide, including in East Asia. Firm bankruptcy risk not only directly affects survival and development of firms but is also a crucial factor related to sustainable development and national economic stability. This paper conducted empirical research using yearly data of 742 listed firms in East Asia between 2014 and 2023. Specifically, the data was divided into 427 manufacturing firms and 315 non-manufacturing firms, and dynamic panel threshold models were used for regression analysis. The results suggest that ESG and its three pillars (E, S and G) have distinct effects on manufacturing and non-manufacturing firms. For non-manufacturing firms, the relationship is contingent on ESG score. With low ESG score, ESG significantly increases bankruptcy risk; however, when ESG score is high, ESG reduces bankruptcy risk. This inverted U-shaped relationship is consistent across all three ESG pillars. In contrast, for manufacturing firms, only S and G pillars exhibit an inverted U-shaped relationship with bankruptcy risk, while higher ESG score and E pillar score are associated with an increased risk of bankruptcy. The increase in bankruptcy risk is mainly driven by low-to-medium polluting firms. These findings highlight the divergent roles of ESG in influencing bankruptcy risk across industries, also helps East Asian firms and governments in ESG implementation and bankruptcy risk management.