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ESG Disclosure and Firm Performance: An Asset-Pricing Approach

Author

Listed:
  • Vinay Khandelwal

    (Jaipuria Institute of Management Jaipur, Jaipur 302033, India
    Stirling Management School, University of Stirling, Stirling FK9 4LA, UK
    Institute of Business Management, GLA University, Mathura 281406, India)

  • Prashant Sharma

    (Jaipuria Institute of Management Noida, Noida 201309, India)

  • Varun Chotia

    (Jaipuria Institute of Management Jaipur, Jaipur 302033, India)

Abstract

Disclosing information on environmental, social, and governance (ESG) parameters is voluntary for most firms across the world. Companies disclose their performance on ESG datapoints due to two main reasons—(i) to gain the trust of stakeholders through increased transparency and (ii) to comply with regulations imposed by governments and investment houses. Using a dataset of companies disclosing ESG parameters during 2014–2021 from the S&P BSE 500 index, this study investigates the role of ESG disclosure on firm performance. We divide the constituent securities into three factors—size, value, and disclosure to study the premiums generated by firms on each factor using single-, double-, and triple-sorting approaches. We utilize time series regressions along with GRS tests to empirically test the presence of factor premiums. We find the significant role of factors size, value, disclosure, and a dummy variable for the COVID-19 pandemic period to explain the portfolio returns. The study found a negative ESG disclosure premium stating that firms with high levels of disclosure earn less returns compared with the firms with less disclosures. The findings of this study contrast with multiple studies in the past that have found a positive disclosure premium. Our findings help reconcile the mixed evidence on the disclosure–returns relationship.

Suggested Citation

  • Vinay Khandelwal & Prashant Sharma & Varun Chotia, 2023. "ESG Disclosure and Firm Performance: An Asset-Pricing Approach," Risks, MDPI, vol. 11(6), pages 1-22, June.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:6:p:112-:d:1168830
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    References listed on IDEAS

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