Environmental, social and governance performance and credit risk: Moderating effect of corporate life cycle

Using a sample of Chinese A-share listed companies from 2018 to 2021, this study examines the impact of ESG performance on credit risk. We find that: first, the ESG performance is positively related Merton's distance to default and credit rating, which indicates that firms with a better ESG performance have lower credit risk. Moreover, performance variability measured as the rolling standard deviation of ROA and cash flow is the key channel for ESG performance to affect credit risk. Good ESG performance reduces the volatility of earnings and cash flow, thereby reducing credit risk. Finally, compared with mature and older companies, the mitigation effect of ESG performance on credit risk is greater for growing companies. These findings are important for stakeholders of firms to consider firms' ESG performance in conjunction with corporate life cycle before investment.