Market reactions to Environmental, Social, and Governance (ESG)-news: evidence from European markets

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Journal ISSN
Volume Title
School of Economics | Master's thesis
Date
2012
Major/Subject
Finance
Rahoitus
Mcode
Degree programme
Language
en
Pages
94
Series
Abstract
PURPOSE OF THE STUDY The purpose of this thesis is to study and evaluate the public attitude and reactions to reportage of environmental, social, and corporate governance (ESG) related corporate misbehavior as they externalize in changes in the investors? investing behavior. More specifically, the stock market reactions to negative ESG-news are measured and analyzed in order to answer how negative ESG-news affect companies? stock returns in the short- and long-run, and whether the market reaction has changed over time. DATA The empirical study is based on a dataset of 123 negative ESG-news concerning companies that are publicly listed in Europe. The news articles were published between 1st of January 1998 and 31st of December 2007 mainly in The Financial Times. The topics of the news were related to irresponsible behavior of companies in regard to people, environment, or laws and regulations. The market reaction to the news was measured as abnormal stock returns, and thus time series of firm specific daily returns were used on this study. RESULTS The main findings of this research show a significantly negative market reaction in stock returns in the short-term (±5 days) and a significantly positive in the long-term (12, 24, and 36 months). Thus, the empirical results indicate that investors overreact to the news. The results also suggest that the short-term negative reaction has intensified over the years and the long-term buy-and-hold abnormal returns have decreased. On average, the initial market reaction was -2.3% and took place four days before the news was published in a newspaper. The 11-day cumulative abnormal returns were -3.1% for the total sample. Significant buy-and-hold abnormal returns were observed during the three post-event years (36 month BHAR +25%), however, significant and positive abnormal returns were not persistently present in each month. The news category of environmental, social or corporate governance influenced significantly the extent and direction of the market reaction.
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Keywords
ESG-news, stock market reaction, corporate social responsibility (CSR), cumulative abnormal returns (CAR), buy-and-hold abnormal returns (BHAR), mean monthly abnormal returns (MMAR)
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