Synergistic Effects of ESG Scores and Market Sentiment on Corporate Financial Performance

Abstract

This paper examines the impact of ESG scores and sentiment on corporate financial performance, utilizing the MSCI ESG KLD STATS dataset alongside ESG sentiment scores derived from a machine learning algorithm. The study posits that firms with elevated ESG scores realize superior short-and long-term investment returns and engage in more effective operational and strategic growth initiatives, leading to reduced unsystematic and systematic volatility. Empirical analysis demonstrates a significant positive influence of ESG performance on capital allocation and leverage decisions. Findings indicate that firms previously characterized by low ESG scores experience notable improvements in financial performance following enhancements in their ESG practices. Moreover, a correlation between higher ESG scores and positive sentiment is associated with stronger performance metrics. Further research highlights that firms in strict regulatory environments achieve better ESG scores and financial outcomes than those in less stringent areas. A subsample analysis also indicates that firms with high ESG scores demonstrate superior performance compared to low-ESG firms.

Keywords: Leverage, financial performance, ESG, systematic risk, sentiment analysis

JEL Classification: G23, M14, M41, G30, A13