Effects of environmental, social and governance performance on idiosyncratic volatility in the U.S.A

In recent years, there has been increased scrutiny on the relationship between business stakeholder engagement and the mitigation of firm-specific risk. The concept of stakeholder governance, especially the "E", "S", and "G" facets of ESG (environmental, social, and governance), can sometimes be convoluted and seemingly contradictory. Examining a cross-industry sample of 1,840 U.S.-listed companies from the year 2005 to 2019 using the Refinitiv ESG performance score, this study reveals that both environmental and social performances are inversely related to idiosyncratic risk. Nevertheless, governance performance does not significantly affect idiosyncratic risk. These results are consistent across various robustness tests, including alternative idiosyncratic risk measurements, two-stage least square regression with instrumental variables, and dynamic GMM models. Additionally, the research indicates that board gender diversity diminishes the relationship between social performance and idiosyncratic risk, while a larger board size weakens the effect of environmental performance on idiosyncratic risk. This evidence suggests that while environmental and social performances effectively lower company risk by fostering strong stakeholder relationships, challenges persist regarding ESG-based governance and board composition. Strong ESG performance often correlates with better relationships with stakeholders, granting companies improved valuations, reduced capital costs, and enhanced risk mitigation relative to their weak-ESG counterparts. However, the onset of the COVID-19 pandemic has instigated skepticism among corporate managers, investors, and academics about the merits of adhering to ESG practices. Utilizing the COVID-19 crisis as an exogenous variable to probe diverse beliefs about corporate ESG initiatives, this study investigates if robust ESG performance diminishes idiosyncratic risk during this tumultuous period. Difference-in-difference model results confirm that companies with strong ESG performance maintained reduced idiosyncratic risk throughout the pandemic. A quantile difference-in-difference approach combined with the adaptive Markov Chain Monte Carlo method delineates the evolving marginal effects of varying ESG performance levels on idiosyncratic risk. The findings emphasize a more pronounced effect in companies exhibiting higher idiosyncratic risk. Furthermore, older firms, those with international operations, or those functioning in multiple segments demonstrated a more potent ESG performance effect in risk reduction during the pandemic. Notably, the political environment and corporate dividend policies significantly influenced this effect. The results stand firm against parallel trend tests, placebo tests, and propensity score matching difference-in-difference models. This research bridges the gap in existing conclusions about investor incorporation of corporate ESG practices into their strategies during the COVID-19 era, offering valuable insights for regulators and corporate managers to more effectively champion and enact ESG practices.

Text 125356 - Full Text.pdf Download (5MB) Text SPE 2023 37 - Declaration Form.pdf Restricted to Repository staff only Download (1MB) Text SPE 2023 37 - Full Text.pdf Restricted to Repository staff only Download (5MB) Official URL or Download Paper: http://ethesis.upm.edu.my/id/eprint/18860

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