The Insurance Value of ESG Performance: An Event Study of European Banking Scandals

Astrid Marie Nafstad Slettan & Nathalie Berenth Hindkjær

Student thesis: Master thesis

Abstract

Initially based on the theoretical groundworks of the stakeholder theory and the resource-based view of the firm, this thesis investigates the ability of a firm’s ESG performance to provide insurance-like protection of market value in the context of a corporate scandal. Applying the event study methodology on a sample of 109 corporate scandals across the European banking industry from 2010-2019, this thesis starts by assessing the potential market value loss following news reports of corporate violations of regulations and laws. Testing the hypothesis that banks’ stocks exhibit abnormal returns in the context of a scandal, this study finds evidence of significant negative abnormal return in the days surrounding the publication of the reports. The loss-reducing properties of ESG are then examined by testing the effect of ESG ratings on the observed abnormal return using regression analysis. As well as testing the effect of overall ESG ratings, we also test distinct environmental, social, and governance ratings. The results show a significant relationship between the banks’ overall ESG performance and less negative abnormal return in the context of a corporate scandal, providing support for the hypothesized insurance-like effect of firms’ ESG performance. We further find support for a varying ability of the distinct ESG factors to mitigate losses. Banks’ environmental and social performance are found to mitigate the negative impact of corporate scandals on the market value of firms, whereas governance performance exhibits no significant relationship with any observed market loss. The conclusions of this study warrant more studies investigating the insurance-like properties of ESG performance in targeted industries and events, as well as the varying impact of distinct ESG practices. Furthermore, the findings warrant further studies conducting qualitative research on the individual assessments of stakeholders, management, and investors in times of crises, and how ESG performance may affect these.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages132