"Climate Vulnerability and Firms’ Default Risk: The Moderating Role of Country-Level Corruption"

Abstract

"This paper examines the relationship between a country’s climate vulnerability and corporate default risk, utilizing a sample of 2,483 firms across 33 European countries. We find that higher country-level climate vulnerability (as measured by the ND-Gain index) is associated with an increased corporate default risk, as measured by the z-score. In addition, we identify that country-level corruption exacerbates the negative impact of climate vulnerability on corporate financial stability. Even firms with strong financial positions face heightened default risks, highlighting the pervasive threat of climate change. Corruption exacerbates this risk by undermining environmental governance, distorting resource allocation, and weakening climate adaptation strategies. Our results remain robust when considering alternative measures of climate vulnerability and default risk, varying model specifications, and addressing endogeneity using instrumental variables. This study emphasizes the critical interplay between climate vulnerability, governance, and corporate resilience, offering insights for policymakers and practitioners alike. JEL CLASSIFICATION: G30, G34, D73 © The Author(s) 2026. This article is distributed under the terms of the Creative Commons Attribution 4.0 License (https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages (https://us.sagepub.com/en-us/nam/open-access-at-sage)."