Do ESG Ratings Affect Stock Prices? The Case of Developed and Emerging Stock Markets

Abstract

This paper examines the role of ESG ratings on stock returns. The sample covers 347 companies from 2010 to 2022 from advanced and emerging stock markets. Return on assets, debt to equity, price-to-book ratio, and price-to-earnings ratio were used as control variables, and panel regression analysis was employed. Results revealed that ESG rating and return on assets statistically positively influence stock market performance. When the components of ESG were tested individually, it was observed that E (environmental) and S (social) ratings positively affect the stock prices. However, no significant relationship was found between G (corporate governance) rating and returns. These findings indicate the importance of investing in stocks and prioritising environmental, social, and governmental concerns regarding portfolio selection decisions. Findings also provide new sights and show that firms, especially in emerging markets, might enhance their market values by paying attention to ESG practices.