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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
first_indexed 2026-03-06T18:04:47Z
last_indexed 2026-03-12T05:33:35Z
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spelling 2026-03-11T14:39:55.8637771 v2 71574 2026-03-06 Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms c633af9f6171d3786b674b4d5a255f06 0000-0001-6962-5699 Zhenghong Ding Zhenghong Ding true false 2026-03-06 CBAE 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. Journal Article The European Journal of Finance 0 1 34 Informa UK Limited 1351-847X 1466-4364 Climate risk, physical risk, credit risk, SMiEs 1 3 2026 2026-03-01 10.1080/1351847x.2026.2634814 COLLEGE NANME Management School COLLEGE CODE CBAE Swansea University Another institution paid the OA fee Ludovico Rossi acknowledges financial support from the Ministerio de Ciencia, Innovación y Universidades, Project PID2024-161782NB-I00. 2026-03-11T14:39:55.8637771 2026-03-06T18:03:21.0678548 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Lara Cathcart 1 Zhenghong Ding 0000-0001-6962-5699 2 Alfonso Dufour 3 Ludovico Rossi 4 Simone Varotto 5 71574__36389__4e8312a6c9154302bf8df83914283c0e.pdf 71574.VOR.pdf 2026-03-11T14:36:21.4678851 Output 4119761 application/pdf Version of Record true © 2026 The Author(s). This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License. true eng http://creativecommons.org/licenses/by-nc-nd/4.0/
title Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
spellingShingle Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
Zhenghong Ding
title_short Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
title_full Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
title_fullStr Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
title_full_unstemmed Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
title_sort Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
author_id_str_mv c633af9f6171d3786b674b4d5a255f06
author_id_fullname_str_mv c633af9f6171d3786b674b4d5a255f06_***_Zhenghong Ding
author Zhenghong Ding
author2 Lara Cathcart
Zhenghong Ding
Alfonso Dufour
Ludovico Rossi
Simone Varotto
format Journal article
container_title The European Journal of Finance
container_volume 0
container_start_page 1
publishDate 2026
institution Swansea University
issn 1351-847X
1466-4364
doi_str_mv 10.1080/1351847x.2026.2634814
publisher Informa UK Limited
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
document_store_str 1
active_str 0
description 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.
published_date 2026-03-01T05:25:13Z
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score 11.099629

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