ESG reputational risk and market valuation: Evidence from the European banking industry

Marco Mandas, Oumaima Lahmar, Luca Piras and Riccardo De Lisa

Research in International Business and Finance, 2024, vol. 69, issue C

Abstract: This study examines the potential bidirectional linkage between reputational risk exposure associated with Environmental, Social and Governance (ESG) factors and market valuation in the banking sector. We build a monthly panel dataset for 19 European listed banks from 2012 to 2020. We employ a Bayesian Panel Vector Autoregressive model to examine the dynamics between the two variables of interest. The findings show an inverse bidirectional causality between ESG reputational risk exposure and banks’ market valuation and suggests that the impact of ESG reputational risk shocks on market valuation is more significant for high-exposed banks. Our results are consistent with the stakeholder and slack resources theories and highlight the importance of ESG factors in influencing the banks’ market valuation. Moreover, the study demonstrates how prior financial performances impact the ESG reputational exposure. These insights provide guidance on how banks can manage their ESG risks to enhance brand identity and market value.

Keywords: Reputational risk; ESG; Market valuation; Panel vector autoregression system; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C32 G21 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000795

DOI: 10.1016/j.ribaf.2024.102286

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