The Nonlinear Impact of Environmental, Social, Governance on Stock Market Performance Among US Manufacturing and Banking Firms

Yan Wang and Ralph Sonenshine ()
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Yan Wang: Department of Economics, American University, Washington, DC 20016, USA
Ralph Sonenshine: Department of Economics, American University, Washington, DC 20016, USA

JRFM, 2025, vol. 18, issue 6, 1-28

Abstract: Results of studies have varied significantly regarding the effect of ESG investment on firm value. This paper weighs in on this issue by analyzing how changes in ESG scores impact excess stock market returns (alpha) and risk-adjusted returns (Sharpe ratio). We also analyze the differential impact of ESG investments on financial performance among US manufacturing and banking firms. Using quantile regression analysis, our results show a nonlinear relationship, characterized by a U-shaped relationship between ESG ratings and alpha but an inverted U-shaped relationship between ESG and the Sharpe ratio. These findings, along with results pertaining to the impact of ESG components, help explain conflicts in the literature regarding the effect of ESG investment on firm value.

Keywords: environmental; social; governance; stock market returns; ESG; Sharpe ratio (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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