ESTIMATING CORPORATE RISK AND CORPORATE VALUE AN APPLICATION OF ALTMAN'S Z-SCORE ON THE KSE-30 INDEX

Abstract

This study is a first endeavor to examine the impact of corporate sustainability risk variables on the financial stability of companies within the specific context of Pakistan. Through the examination of data derived from the KSE-30 index stocks, covering the timeframe from 2020 to 2022, and utilizing Altman's Z-Score as a measure of financial stability, our objective is to elucidate the complex correlation between Environmental, Social, and Corporate Governance (ESG) risk scores and the probability of a company's continued existence. The results of our study indicate a significant decrease in the overall ESG ratings of stocks listed in the KSE-30 index in recent years. This suggests that companies are increasingly focusing their efforts and allocating resources towards tackling sustainability issues. It is noteworthy that our findings indicate that Altman's Z-Score is negatively influenced by Environmental (E) and Social (S) risk variables, whereas Governance (G) have a low impact. The aforementioned fresh insights possess significant significance, as they show a previously unestablished connection between heightened environmental and societal hazards and a decline in financial stability. This connection eventually leads to an increase in default risks and the subsequent costs connected with them. Furthermore, our research highlights the increased susceptibility of alterations in Altman's Z-Score to fluctuations in Environmental (E) risk, particularly among enterprises of smaller size. The aforementioned findings highlight the utmost importance of sustainability risk, namely social risk, in influencing the likelihood of a firm's survival. Hence, the implementation of efficient risk reduction strategies can greatly contribute to the improvement of financial stability inside corporations.