ABSTRACT
In recent years the concept of the “sustainability” companies has been at the forefront of concerns for many investors. As most consideration of sustainability has focused on the broad ideas of ESG concerns (Environmental, Social and Governance), the field has lacked a straightforward metric by which investors can assess “How many years into the future is a given company likely to survive without bankruptcy?”. While somewhat similar to a credit rating, such a measure must also consider the situation of firms with no current debt, and those that are pathologically conservative so as to survive until eventually becoming obsolete. Such a metric was introduced in [?] based on an extension of the Merton contingent-claims model [?]. In this study, we illustrate refinements of the methodology and present empirical analysis of the relationship between the sustainability metric and investor returns from 1992 through 2021 for all equities traded on US exchanges (inclusive of non-US firms traded in ADR form). The results show statistically significant relationships that may be exploited for superior returns in both equity and corporate bond markets.
