The impact of ESG controversies on stock returns – Evidence from European markets

Abstract

The aim of this study is to shed light on the European equity markets by investigating how companies’ exposure to adverse ESG-related media disclosure impacts annual stock returns. Deriving from the resource-based view and the signalling theory, my empirical results show that investors consider ESG controversies value relevant. I find that increased controversies, measured as a decrease in the ESG controversies score, have a negative impact on annual stock returns. Contrary to expectations, when interacting the ESG controversies score change with firm size, trading volume, and ESG controversies score level, I do not find the effect to depend on these firm characteristics. Lastly, I find that on a sector specific level, companies operating in Basic Materials face a negative impact on returns from increased controversies. These findings contribute to the ongoing research on the connection between corporate financial performance and environmental, social, and governance reputation, specifically reflected in global media.