ESG Rating Events and Stock Market Reactions
56 Pages Posted: 22 Mar 2021 Last revised: 31 Mar 2022
Date Written: March 12, 2021
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: Suggested Citation