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Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms

Lara Cathcart, Zhenghong Ding Orcid Logo, Alfonso Dufour, Ludovico Rossi, Simone Varotto

The European Journal of Finance, Pages: 1 - 34

Swansea University Author: Zhenghong Ding Orcid Logo

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DOI (Published version): 10.1080/1351847x.2026.2634814

Abstract

We investigate the impact of escalating temperatures and heavy rainfall on the default probability of small and micro enterprises (SMiEs) in six European countries between 2005 and 2014. Our findings reveal that a one standard deviation increase (2.56∘⁢C) in the yearly mean temperature raises a firm...

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Published in: The European Journal of Finance
ISSN: 1351-847X 1466-4364
Published: Informa UK Limited 2026
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa71574
Abstract: We investigate the impact of escalating temperatures and heavy rainfall on the default probability of small and micro enterprises (SMiEs) in six European countries between 2005 and 2014. Our findings reveal that a one standard deviation increase (2.56∘⁢C) in the yearly mean temperature raises a firm's default probability by 86.5 basis points. Additionally, a one standard deviation increase (2.46 mm) in the Simple Precipitation Intensity Index increases the default probability by 32.4 basis points. We argue that one channel explaining the adverse impact of climate risk on default probability is labour productivity loss. In addition, micro and financially constrained firms exhibit increased vulnerability to these risks. However, when the ultimate owners also serve as the firms' managers, they can mitigate the adverse effects of rising temperatures and heavy rainfall.
Keywords: Climate risk, physical risk, credit risk, SMiEs
College: Faculty of Humanities and Social Sciences
Funders: Ludovico Rossi acknowledges financial support from the Ministerio de Ciencia, Innovación y Universidades, Project PID2024-161782NB-I00.
Start Page: 1
End Page: 34

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