Empirical Analysis of Environmental Social and Governance Related Incidents Impact on Stock Price Behaviour

Andreas Borud Strandhagen & Edvard Strand Edding

Student thesis: Master thesis

Abstract

The market reaction to non-financial information has received an increased amount of atten-tion as responsible investments expand. There is uncertainty regarding the degree markets can effectively price non-financial information, such as environmental, social, and governance (ESG) factors. Hence, empirical evidence to support the link between ESG and financial performance could resolve the ambiguity in financial motives to invest responsibly. This paper provides the field with a tool to investigate the relationship between non-financial in-formation and financial performance. A selection method, based on predetermined inclusion criteria was constructed. News articles acted as proxies for market information and stock price behaviour as financial performance. Negative news articles related to ESG formed the foundation for incident identification in the event study which enabled investigation of post-event financial performance. Event study methodologies such as the market model, buy-and-hold abnormal return, and calendar time portfolio approach were applied. Esti-mations found short-term negative cumulative average abnormal returns of −1.69% over an event window of +-10 days. Long-term abnormal returns for holding period of 12, 24, and 36 months show lasting negative returns of −6%, −10.54%, and −17.84%. Conclusively, immediate negative stock price reaction supports the precision of the constructed selec-tion method. Both short- and long-term negative abnormal returns indicate a connection between corporate financial performance and ESG. Persistent negative abnormal returns imply an increased cost of capital and lowered operational earnings for inflicted companies. Overall, the presented empirical evidence could lead to increased investor awareness, better decision making, and increased market efficiency.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages171
SupervisorsLasse Heje Pedersen