ESG Ratings: The Hidden Predictor of Stock Price Reactions to Negative ESG News?

Abstract

This thesis investigates if companies with high ESG ratings are less impacted by negative ESG news on their stock prices compared to companies with low ESG ratings. Utilizing event study methodology, cross-sectional- and logistic regression, the study examines 394 firms from STOXX 600 (2010-2020), encompassing 1,095 negative ESG events. As expected, we find that firms with higher ESG ratings are less likely to face future negative news, and stock prices decline by an average of -0.35% (-0.68%) over 11-days (21-days), regardless of rating. Surprisingly, the highest severity events can buffer against negative impacts, with market reactions varying by news severity and ESG rating. Furthermore, companies above the median ESG rating experience more pronounced long-term negative impacts when controlling for different characteristics. In conclusion, both ESG ratings and the severity of negative ESG news influence stock market reactions, revealing that while high ESG ratings can mitigate some risks, they also attract increased scrutiny and higher market expectations.