Market Manipulation and ESG Incidents

Abstract

Market manipulation are deliberate actions that affect trading activity and corporate policies. We conjecture that market manipulation has unintended consequences also for the ESG policies of the firm. Based on an international sample of monthly data from 2007 to 2018, the data indicate that the presence of market manipulation in a stock increases the probability of ESG incidents by the firm in the ensuing year by more than 1%. We present evidence that this effect is driven by the three channels: financial frictions, business risk, and employment changes. The findings are robust to numerous checks and different fixed effects structure. We also mitigate the endogeneity concerns by using a quasi-natural experiments that improved transparency in difference-in-difference research design.

Keywords: ESG, market manipulation, MiFID, mandatory ESG disclosure, short-terminism

JEL Classification: G14, G15, Q50