Corporate social responsibility and default risk under firm size and age in Nordic countries

Predicting corporate default risk is critical for financial stability and informed decision-making by regulators and market participants. Despite the strong sustainability orientation of Nordic economies, the determinants of corporate default risk in this region remain poorly understood. Grounded in stakeholder theory, reputation management, and financial risk management theories, this study examines the impact of corporate social responsibility (CSR) on firms’ forward-looking default risk. Using a balanced panel of 105 publicly listed Scandinavian firms from Denmark, Finland, Norway, and Sweden for 2014–2023, CSR is proxied by aggregate environmental, social, and governance (ESG) scores, while default risk is measured by the one-year-ahead forward default risk. Fixed-effects panel regressions and instrumental variable generalised method of moments estimations are used to address unobserved heterogeneity and endogeneity concerns. The results consistently indicate a significant negative relationship between CSR performance and default risk, supporting the view that CSR investments function as a risk-mitigation mechanism. Moreover, the effect is heterogeneous across firms. Specifically, the risk-reducing effect of CSR is stronger for smaller and younger firms, suggesting that CSR serves as a more effective signal and reputation-building tool for less-established companies. Among the control variables, default risk is negatively associated with liquidity, firm age, and asset turnover, but positively associated with profitability. Overall, the findings highlight the importance of CSR as an insurance-like mechanism to reduce credit risk, particularly for firms with limited reputational capital, and offer valuable insights for investors, creditors, and policymakers who rely on publicly available financial and ESG disclosures in the Nordic context.