Is Default Risk Contagious? Evidence from Global Energy Leaders and Environmentally Conscious Energy Firms

Abstract

We examine the default risk spillover for two groups of global energy firms, including top energy firms from seven different sectors as well as energy firms scoring highest in terms of environment disclosure. We first perform a bibliometric review to uncover the trends in existing literature related to our research objectives. We then utilize novel, daily frequency data of ‘distance to default’ measure to perform two important co-movement techniques namely wavelet and TVP-VAR. The sample period is from 29 June 2009 to 30 June 2021. Our wavelet results reveal that both the groups exhibit spillover of default risk. However, there is higher interdependence of default risk in environment conscious energy firms during normal as well as crisis periods. The TVP-VAR results portray the interaction across both groups of firms and show heightened connectedness between the sampled firms for the sample period. We also identify net transmitters and receivers of shocks. The results carry important implications for investors and policymakers.