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

Cathcart, L., Ding, Z., Dufour, A. ORCID: https://orcid.org/0000-0003-0519-648X, Rossi, L. and Varotto, S. ORCID: https://orcid.org/0000-0001-5328-5327 (2026) Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms. European Journal of Finance. ISSN 1466-4364 doi: 10.1080/1351847X.2026.2634814 (In Press)

Abstract/Summary

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.

Item Type	Article
URI	https://centaur.reading.ac.uk/id/eprint/128533
Identification Number/DOI	10.1080/1351847X.2026.2634814
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Taylor and Francis
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