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Aggravating effect: ESG performance and reputational penalty

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  • Chao, Wu
  • Yifei, Xing
  • Shuai, Yang

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.

Suggested Citation

  • Chao, Wu & Yifei, Xing & Shuai, Yang, 2025. "Aggravating effect: ESG performance and reputational penalty," Finance Research Letters, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324015447
    DOI: 10.1016/j.frl.2024.106515
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    More about this item

    Keywords

    Media coverage; ESG performance; Reputational penalty; Corporate fraud;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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