The Geography of ESG: How Location Shapes the Stock Price Response to Corporate Wrongdoing

Abstract

We study stock price reactions to 375,213 global environmental, social, and governance (ESG) incidents from 2007 to 2020. Four in five incidents occur outside the offending firm’s headquarter country. These foreign incidents trigger a stock price response that is 0.3 percentage points less negative than that of domestic incidents. This return gap between foreign and domestic incidents widens with severity of the incident and the media attention it receives; it narrows for firms headquartered in countries where citizens exhibit greater concern for global issues and support for foreign aid. Notably, the return gap is not driven by differential incident impacts on sales or profitability. Furthermore, among foreign incidents, returns are more negative when the offending firm has a larger shareholder base in the country where the incident occurred.

Keywords: environmental and social investing, home bias, law and finance, corporate social responsibility

JEL Classification: F23, F64, G14,M14