ESG Rating Events and Stock Market Reactions

56 Pages Posted: 22 Mar 2021 Last revised: 31 Mar 2022

See all articles by Maximilian Glück

Maximilian Glück

Friedrich-Alexander-Universität Erlangen-Nürnberg

Benjamin Hübel

HUK-COBURG Asset Management

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Date Written: March 12, 2021

Abstract

This paper examines the effect of environmental, social and governance (ESG) rating events on stock return and risk using a large sample of US firms and their MSCI ESG ratings. First, an event study shows that markets react with significant negative abnormal returns to downgrades in environmental and social scores. These rating changes thus seem to provide new value-relevant information to market participants. We then apply a difference-in-differences approach to assess whether changes in ESG ratings affect stock risk (downside, systematic and total risk). Our findings suggest that rating changes materialize shortly after the rating events. Upgrades in environmental scores significantly moderate downside risk, whereas upgrades in governance scores mitigate systematic risk. Thus improving their firm’s ESG profile allows managers to effectively mitigate value-relevant risk in the short term which, in turn, could also benefit investors seeking lower risk.

Keywords: ESG rating, ESG performance, Abnormal returns, Equity risk

JEL Classification: G14, G23, G24, G41

Suggested Citation

Glück, Maximilian and Hübel, Benjamin and Scholz, Hendrik, ESG Rating Events and Stock Market Reactions (March 12, 2021). Available at SSRN: https://ssrn.com/abstract=3803254 or http://dx.doi.org/10.2139/ssrn.3803254

Maximilian Glück (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

Benjamin Hübel

HUK-COBURG Asset Management ( email )

Germany

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

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