The Role of ESG in Predicting Middle East Corporate Financial Distress

Abstract

Extant literature suggests that environmental, social, and governance (ESG) can potentially impact predicting financial distress. However, to our knowledge, no studies consider ESG a predictor of ME corporate financial distress. This research investigates the issue by analyzing 14 companies headquartered in the ME from 2005 to 2022. A multiple linear regression analysis was employed in the study to investigate the association between financial distress prediction and ESG with various factors. Our findings indicate that the ESG variable can be considered in predicting financial distress in the ME corporate sector, as companies with a higher ESG score are associated with a lower risk of financial distress. In addition, focusing on maintaining and increasing earnings assets, generating revenue to maintain profitability, and a higher current asset to meet the financial obligation are statistically significant and indicate better financial performance. However, the inflation variable is less effective in predicting financial distress. Due to the study's restrictions on the corporate sector and not all organizations using ESG reporting, other companies cannot be examined. This study is essential for investors in ME corporate sector to recognize the importance of ESG and other factors to predict financial distress and reduce risk.