Aggravating effect: ESG performance and reputational penalty

Wu Chao, Xing Yifei and Yang Shuai

Finance Research Letters, 2025, vol. 72, issue C

Abstract: This study investigates the impact of environmental, social, and governance (ESG) performance on reputational penalties imposed on companies involved in corporate fraud. We introduce the concept of the expectation gap between ESG performance and subsequent fraudulent behavior to explain how the media enforces reputational penalties as a response to image reversal. Our results indicate that higher ESG performance exacerbates negative media coverage of fraudulent firms, suggesting that the expectation gap plays a significant role in shaping reputational penalties. Further analysis reveals that this amplifying effect is more pronounced for firms with weaker internal controls. These findings suggest that ESG performance serves as an accelerator of reputational penalties when firms fail to meet ethical expectations.

Keywords: Media coverage; ESG performance; Reputational penalty; Corporate fraud (search for similar items in EconPapers)
JEL-codes: G14 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324015447

DOI: 10.1016/j.frl.2024.106515

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