ESG scores, scandal probability, and event returns

Wenya Sun, Yichen Luo, Siu-Ming Yiu, Luping Yu and Wenzhi Ding ()
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Wenya Sun: The University of Hong Kong
Yichen Luo: University College London
Siu-Ming Yiu: The University of Hong Kong
Luping Yu: Xiamen University
Wenzhi Ding: The Hong Kong Polytechnic University

Financial Innovation, 2024, vol. 10, issue 1, 1-21

Abstract: Abstract The informativeness of environmental, social, and governance (ESG) scores and their actual impact on firms remains understudied. To address this gap in the literature, we make theoretical predictions and conduct empirical research revealing that a high ESG score is associated with a lower probability of ESG scandals and lower stock returns during a scandal event. Our results suggest that ESG scores are heterogeneous but informative, and that a strong ESG reputation may have both positive and negative consequences for firms. Drawing on our findings, we develop a model and showcase that firms face an optimization problem when determining optimal ESG investment levels. Two equilibria may exist based on the trade-off between ESG scandal losses and ESG adjustment costs. Our model explains why certain firms make heterogeneous ESG decisions

Keywords: ESG score performance; ESG scandal; ESG adjustment cost (search for similar items in EconPapers)
JEL-codes: G12 G24 L82 Q01 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s40854-024-00635-1

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