Net‐zero policy and forward default risk in the energy sector: Evidence of corporate environmentalism using (a)symmetric models

Abstract

This study aims to examine the impact of the net‐zero policy on forward default risk at the firm level within the energy sector of the US, spanning over the period 2007–2021. The research employs Panel Vector Autoregression (PVAR) modeling, as well as linear and non‐linear Autoregressive Distributed Lag (ARDL) models to investigate this relationship. The findings suggest that the implementation of net‐zero policy measures can have complex effects on firms' default risk in both the short and long run. The PVAR results confirm a unidirectional negative impact of net‐zero policies on forward default risk over 2, 3, and 5 years. The symmetric ARDL model results show a negative long‐run impact on the future probability of default, with short‐run impacts being positive across all time horizons. The asymmetric ARDL model findings indicate that positive net‐zero measures reduce the probability of default in the long run and increase it in the short run across all time horizons. Conversely, negative shocks of net‐zero measures lead to an increase in the forward probability of default in the long run. The differences in findings between the long and short run are attributed to the effects of capital expenditures on infrastructure expenses required to achieve net‐zero results. This study contributes to the literature on financial outcomes and the impact of adopting sustainable development and net‐zero goals. The policy implications suggest that a supportive institutional framework must be provided to reduce the financial default in energy sector firms, which will assist in capital and infrastructure expenditures in the short run.