Do investors penalize lack of prevention of ESG incidents?

Abstract

I examine market reaction on 1987 global ESG incidents over ten years, from 2010 to 2020. To evaluate if investor value negative ESG information consistently, independent on company traits, event study of mean cumulative abnormal returns is applied. ESG incident do not cause market reaction. Investor values ESG incidents differently, depending on company traits. I find that investors value negative ESG information for companies that show lack in preventive measures on ESG incidents. Companies with lack of preventive measures experience a negative effect on abnormal returns and underperform compared to companies that show favorable traits.

I examine market reaction on 1987 global ESG incidents over ten years, from 2010 to 2020. To evaluate if investor value negative ESG information consistently, independent on company traits, event study of mean cumulative abnormal returns is applied. ESG incident do not cause market reaction. Investor values ESG incidents differently, depending on company traits. I find that investors value negative ESG information for companies that show lack in preventive measures on ESG incidents. Companies with lack of preventive measures experience a negative effect on abnormal returns and underperform compared to companies that show favorable traits.