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

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

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.

Suggested Citation

  • Mandas, Marco & Lahmar, Oumaima & Piras, Luca & De Lisa, Riccardo, 2024. "ESG reputational risk and market valuation: Evidence from the European banking industry," Research in International Business and Finance, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000795
    DOI: 10.1016/j.ribaf.2024.102286
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    More about this item

    Keywords

    Reputational risk; ESG; Market valuation; Panel vector autoregression system; Bayesian estimation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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