Abstract
We investigated the impact of ESG practices on liquidity within Korea's KOSPI-listed firms during the period 2012-2022. ESG practices are known to reduce idiosyncratic risk through the disclosure of non-financial information. This suggests that a high level of ESG performance can enhance stock liquidity by reducing adverse selection costs. The levels of ESG performance were evaluated using KCGS's annual firm-level ESG ratings. Liquidity was evaluated using Amihud(Roll)’s measure. Our primary findings are as follows: We determined that ESG activities can serve as a channel to decrease illiquidity in the Korean stock market. Additionally, in the comparative analysis of the impact of ESG activities on liquidity during and before the COVID-19 pandemic, we discovered that the liquidity-increasing effect of ESG activities was particularly potent during the crisis. This indicates that unexpected shocks like COVID-19 have emphasized the demand for sustainable management, leading companies to voluntarily explore more effective ESG management strategies in response to investor demands, resulting in improved liquidity.
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