Rain or shine, default risks align: exploring the climate-default nexus in small and micro firms
Author(s)
Cathcart, Lara
Ding, Zhenghong
Dufour, Alfonso
Rossi, Ludovico
Varotto, Simone
Type
Journal Article
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.
Date Issued
2026-05-01
Date Acceptance
2026-02-16
Citation
European Journal of Finance, The, 2026, 32 (7), pp.856-889
ISSN
1351-847X
Publisher
Taylor and Francis Group
Start Page
856
End Page
889
Journal / Book Title
European Journal of Finance, The
Volume
32
Issue
7
Copyright Statement
© 2026 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.
Publication Status
Published
Date Publish Online
2026-03-01