Climate-adjusted credit risk and bankruptcy prediction models across firm size categories in developing countries: evidence from firm-level balance sheet data

Firms in developing economies face rising insolvency risk due to the interaction of structural financial constraints and increasing exposure to climate-related physical hazards. This study develops and empirically evaluates a framework for climate-adjusted credit risk and bankruptcy prediction using firm-level balance-sheet data from the World Bank Enterprise Survey. New firm-level datasets are constructed, including output volatility estimates based on value-added growth, baseline and climate-adjusted liability-based probabilities of default, and forward-looking default projections under Shared Socioeconomic Pathways from the IPCC Sixth Assessment Report. Asset values for unlisted firms are reconstructed using a production-based framework, while firm-level volatility is estimated from the dispersion of value-added growth across country-firm size groups. Liability-based probabilities of default are computed using a structural default model and adjusted for climate physical risk through firm-level exposure to expected annual impacts of climate. These climate-adjusted default measures are then linked to observable financial ratios through a fractional logit Altman-style bankruptcy model that incorporates country, sector, and firm-size heterogeneity. The results reveal substantial cross-regional and size-based variation in climate-induced insolvency risk and show that the effects of firm financial conditions on default risk vary across firm sizes and regional contexts. These findings contribute to the climate-finance literature by providing new data, an integrated modelling framework, and a policy-relevant approach to climate-aware credit risk assessment for unlisted firms in developing economies.