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ESG scores, scandal probability, and event returns

Author

Listed:
  • Wenya Sun

    (The University of Hong Kong)

  • Yichen Luo

    (University College London)

  • Siu-Ming Yiu

    (The University of Hong Kong)

  • Luping Yu

    (Xiamen University)

  • Wenzhi Ding

    (The Hong Kong Polytechnic University)

Abstract

The informativeness of environmental, social, and governance (ESG) scores and their actual impact on firms remains understudied. To address this gap in the literature, we make theoretical predictions and conduct empirical research revealing that a high ESG score is associated with a lower probability of ESG scandals and lower stock returns during a scandal event. Our results suggest that ESG scores are heterogeneous but informative, and that a strong ESG reputation may have both positive and negative consequences for firms. Drawing on our findings, we develop a model and showcase that firms face an optimization problem when determining optimal ESG investment levels. Two equilibria may exist based on the trade-off between ESG scandal losses and ESG adjustment costs. Our model explains why certain firms make heterogeneous ESG decisions

Suggested Citation

  • Wenya Sun & Yichen Luo & Siu-Ming Yiu & Luping Yu & Wenzhi Ding, 2024. "ESG scores, scandal probability, and event returns," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-21, December.
    • Handle: RePEc:spr:fininn:v:10:y:2024:i:1:d:10.1186_s40854-024-00635-1
    DOI: 10.1186/s40854-024-00635-1
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    References listed on IDEAS

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    More about this item

    Keywords

    ESG score performance; ESG scandal; ESG adjustment cost;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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