PTDoes requiring firms to disclose sustainable practices bring them closer to bankruptcy?
Between 2016 and 2022, six emerging countries, Brazil among them, began to require listed firms to report what they do for the environment, for people and for good governance (ESG). The study followed 6,126 firms in 11 countries from 2014 to 2023 to see what the requirement did to their risk of bankruptcy. Explained in 11 screens.
One column per country, from 2014 to 2023. The red block appears in the year disclosure became mandatory (section 3.2). The heights are equal on purpose.
Disclosure can protect the firm or weigh on its cash
Disclosing ESG practices can be the firm's choice or a legal requirement. Once it becomes law, everyone reports, and in the same format.
Four finance theories disagree on the effect on bankruptcy risk. Put each one on the scale.
Side of each theory read from sections 2.2.1 to 2.2.4 of the dissertation (our classification). Agency theory appears on both sides: ESG spending may be a cost for managers' image or may improve results.
Six countries began to require it, each in its own year
Malaysia and Peru went first, in 2016. Brazil came last, in 2022. South Africa, Argentina, Russia, China and Mexico did not create the requirement and serve as the comparison.
Start year of each rule according to sections 1.4 and 3.2; details of the laws in section 2.1.4. Tap a country to see its law.
Earlier studies did not agree
The dissertation gathered four similar studies, all using the method you will meet on screen 07. Before turning each card, bet: after the rule, did firms' risk fall, rise or stay the same?
6,126 firms followed for ten years
Listed non-financial firms in 11 emerging countries, with data from 2014 to 2023 (Capital IQ and World Bank). Six countries form the group that made disclosure mandatory; five, the comparison group.
- Emerging country, according to the World Bank.
- At least five non-financial firms with an S&P credit rating in some year. For the author, having a credit rating shows concern with bankruptcy risk.
- Positive equity and assets above US$ 1 million.
Each dot = 1% of 61,260, the maximum possible number of firm-years (6,126 firms × 10 years, our count). Observations from Table 3: 38,928 for the Z-score and 53,002 for the cost of debt. The dissertation does not report how many firms are in each group.
Two risk yardsticks that point in opposite directions
Nobody measures bankruptcy before it happens; we measure signs. The Altman Z-score adds up five balance-sheet ratios: the higher it is, the safer the firm. The cost of debt is how much interest the firm pays on what it owes: the higher it is, the riskier the firm looks to lenders.
Made-up firm, in R$ millions (Brazilian reais). Formulas from Table 2: Z = 1.2·X1 + 1.4·X2 + 3.3·X3 + 0.6·X4 + 1.0·X5; cost = financial expenses ÷ total debt. Altman's (1968) zones cited in section 4.1: below 1.81, danger; from 1.81 to 2.99, grey; above 2.99, safe. The black mark is the sample mean (Table 3).
Instead of levels, the study compares how much each group changed
The method is called difference-in-differences (DID). It treats the law as a natural experiment: it compares the change in risk of firms in the countries that made disclosure mandatory with the change in the countries that did not.
illustration Made-up numbers to show the logic. In the study, each country has its own "after" (the year of its law), and the model controls for what is specific to each country and each year. The method's premise: without the law, both groups would have followed the same trend.
With the requirement, the signs of risk worsened
In the main test, the Z-score of firms in the countries that made disclosure mandatory fell relative to that of firms in the other countries, significant at 1%. In the robustness test, the cost of debt rose, but only significant at 10%: a clue in the same direction.
Coefficients from Table 5 (country and year fixed effects, robust errors). Means from Table 3. The cost of debt is a fraction, so 0.0045 equals 0.45 percentage point (our calculation, from the formula in Table 2). The right-hand bar adds the effect to the mean only to give the scale.
Not every factor points the same way on both yardsticks
The model also accounts for three characteristics of firms and three of countries. Bet on each one: with more of it, does bankruptcy risk rise or fall?
"Theory expected": sections 2.2.6 and 2.2.7. Results: Table 5, read in the direction of risk (higher Z = lower risk; higher cost = higher risk). "Clue" = significant only at 10%.
Profit lowers risk on one yardstick and raises it on the other
By the Z-score, firms that earn more on their assets are further from bankruptcy; by the cost of debt, they pay higher interest. Move the controls and watch both react.
our simulation Starts from the mean of each measure (Table 3), with ROA of 6% and tangibility of 41%, close to the means, and adds the ROA and tangibility coefficients from Table 5, with everything else held fixed. It shows the direction and size of the coefficients; it does not predict the risk of a real firm.
What changes for those who disclose, invest or regulate
Firms
Knowing that the requirement came with more signs of risk helps plan sustainable actions without neglecting cash and continuity.
Investors and lenders
The study links two pieces of information that weigh on investment decisions: ESG practices and bankruptcy risk.
Regulators
For the author, the results call for flexible ESG rules adapted to emerging markets, which do not compromise firms' financial stability.
Researchers
Suggested next step: the effect of the international IFRS S1 and S2 standards, in force since 2024, on bankruptcy risk, before and after adoption.
What this study does not say
- Few countries meet the criterion. Only emerging countries with at least five firms rated by S&P are included. · according to the author
- Signs of risk, not bankruptcies. The Z-score and the cost of debt are thermometers; no actual bankruptcy was counted. And the average effect still leaves the Z-score in the safe zone. · our observation
- The method's premise was not tested in the text. The dissertation does not show whether the groups followed the same trend before the laws, nor the effect year by year, nor how much the model explains. Malaysia and Peru have only two years before the law; Brazil, only two after. · our observation
- Different laws, one single event. Phased rules (India), banks first (Indonesia) and "comply or explain" (Brazil) enter as the same change. · our observation
- The confirmation is partial. In the cost of debt, the effect passed only at 10% significance. · our observation (Table 5)
Credits
LOPES, Mateus Del Col. A relação entre a obrigatoriedade da divulgação de práticas sustentáveis e o risco de falência das empresas: uma análise de países emergentes [The relationship between mandatory disclosure of sustainable practices and firms' bankruptcy risk: an analysis of emerging countries]. Master's dissertation (Business Administration), Mackenzie Presbyterian University, São Paulo, 2025. Advisor: Prof. Dr. Michele Nascimento Jucá.
Research supported by CAPES (Brazil's federal agency for graduate education). Data from Capital IQ and the World Bank. This version simplifies the work for a general audience; the formulas and full tables are in the original text.