ESG performance and financial distress risk: Does the overseas experience of executives play a role?

Abstract

Existing literature generally focuses on ESG disclosure and performance in relation to deterring financial distress risk (FDR), neglecting the potential impact of executives' foreign experience on financial stability. This study empirically examines how ESG performance affects the risk of financial distress and investigates the role of executives with overseas experience within this relationship. Data from Saudi-listed firms (2010-2022) shows that companies with higher ESG ratings tend to have lower FDR. Furthermore, the economic benefits of ESG in reducing the likelihood of financial distress are more noticeable in firms led by executives with foreign experience. However, additional analyses suggest that ESG's ability to reduce the risk of financial distress is only evident during stable periods. The results remain consistent across different measures of FDR, executives' foreign experience, model specifications, and potential endogeneity concerns. Our study provides valuable theoretical and practical insights, emphasising the important role of executives' overseas experience in mitigating FDR in firms with strong ESG performance.

Keywords: ESG performance; Financial distress risk; International experience; Saudi Arabia.