Geopolitical risk, ESG Controversies, Trade Credit and Stock Liquidity

We study how geopolitical risk (GPR) affects firms’ use of trade credit (TC). Using a sample of 30,704 listed firms, from 42 countries, that are covered by the GPR index over the period 1990 to 2023, we show that trade credit is positively related to geopolitical risk. Moreover, we show the validity of financial constraints as a channel through which GPR affects TC. Furthermore, we show that the positive association between GPR and TC is stronger (weaker) in firms with high Environmental, Social, and Governance (ESG) performance (cash flow risk and product market competition). Additionally, utilizing a dataset comprising 12,084 firm-year observations from 32 countries between 2013 and 2022, we investigate the impact of (ESG) controversies on stock market liquidity, with a particular focus on the mediating role of GPR. Our analysis reveals a consistently positive and highly significant relationship between ESG controversies and stock liquidity, as measured by the natural logarithm of the Amihud illiquidity ratio (LN_AMIHUD), with this effect being more pronounced in regions experiencing high geopolitical instability. Moreover, we show that the ESG performance and the existing of sustainability committee mediate this relationship by enhancing stock liquidity. All results hold up under a series of robustness tests including the use of approaches to address endogeneity issues.