The Stock and Option Market Response to Negative ESG News

17 Pages Posted: 21 Jun 2023 Last revised: 22 Jul 2024

See all articles by Tomasz Orpiszewski

Tomasz Orpiszewski

Zurich University of Applied Sciences

Mark Thompson

Austrian Institute of Technology

Peter Schwendner

Zurich University of Applied Sciences

Date Written: June 14, 2023

Abstract

This study investigates the response of stock prices and equity options to negative ESG incidents reported by RepRisk for S&P 500 companies between 2006 and 2021, considering the increasing significance of ESG ratings among fund managers and the widespread utilization of financial derivatives by investors. By conducting event studies, we find that, on average, stock prices and option implied volatility show a minimal day-to-day reaction to ESG incidents. However, more severe incidents and those reported by major business sources result in a more pronounced increase in implied volatility within a 10-day period following the event. Additionally, our empirical analysis highlights the influence of financial materiality on asset prices, as financially material ESG incidents lead to significant declines in stock prices and an upward surge in implied volatility. Notably, this effect is particularly prominent for incidents related to Natural Capital. In conclusion, we find that the options market effectively incorporates information regarding ESG events, while stock prices exhibit comparatively lower and less systematic reactivity.

Keywords: ESG news, Implied Volatility, Market Reaction

JEL Classification: G13, G14, M14, G41

Suggested Citation

Orpiszewski, Tomasz and Thompson, Mark and Schwendner, Peter, The Stock and Option Market Response to Negative ESG News (June 14, 2023). International Journal of Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4478825 or http://dx.doi.org/10.2139/ssrn.4478825

Tomasz Orpiszewski (Contact Author)

Zurich University of Applied Sciences ( email )

Gertrudstrasse 8
Winterthur, 8401
Switzerland

Mark Thompson

Austrian Institute of Technology ( email )

Donau-City-Strasse 1
Vienna, 1220
Austria

Peter Schwendner

Zurich University of Applied Sciences ( email )

School of Management and Law
Gertrudstrasse 8
Winterthur, CH 8401
Switzerland

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