The Vulnerability Puzzle: Exploring Environmental and Financial Risks in the MENA Region

This study investigates the effects of environmental costs on corporate default risk using a panel of 326 firms across 10 Middle Eastern and North African (MENA) countries—Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—analysed over the period from 2010 to 2022. Our findings show that high environmental costs increase corporate default risk, resulting in financial instability and reputational damage. This underlines challenges of MENA firms to maintain both legitimacy and resource adequacy, supporting the institutional theory and resource-based view perspectives. Specifically, five environmental sub-indices—natural resources, air pollution, land/water pollutants, greenhouse gas emissions, and water consumption—are associated with increased default risk, while waste management does not exhibit a significant impact.