Abstract
In this study, we investigate the effects of the level and changes in environmental, social and corporate governance (ESG) rating, an index developed to represent a firm’s long-term sustainability, on the stock market returns of Korea Composite Stock Price Index (KOSPI) listed firms over the period 2011–2018. We find that the changes in ESG ratings have statistically significant short-term effects on their abnormal returns. However, their impacts on short-term abnormal returns decrease some days after the disclosure and become negative in the third year. The results imply that investors in the Korean stock market do not view corporate social responsibility activities as a means of supporting their long-term sustainability, judging from the firm value for a long period after their rating. Rather, based on the effects of the changes on coefficient signs over the period—positive in the year and the year after, no effects in the following year, and negative in the third year and later—we can infer that the short-term oriented market sentiments of investors might worsen their long-term stock performances, thus deteriorating their sustainability and growth opportunities.
Highlights
In the recent era of worsening unethical capitalism and increasing uncertainty, the importance of corporate social responsibility (CSR) has been emphasized [1,2]
We investigate the effects of the level and changes in environmental, social and governance (ESG) ratings, developed to represent a firm’s long-term sustainability, on the stock market returns of Korea Composite Stock Price Index (KOSPI)–listed firms in Korea over the period 2011–2018
These results indicate that the stock market reacts when a firm is newly ESG rated or when the disclosure occurs in which the ESG rating rises or falls
Summary
In the recent era of worsening unethical capitalism and increasing uncertainty, the importance of corporate social responsibility (CSR) has been emphasized [1,2]. Unlike developed countries such as US and UK, the agency problems between controlling shareholders and minority shareholders are more severe in Korea with a relatively weak corporate governance system for minority shareholders [6] In this regard, investigating the impact of ESG activities on long-term sustainability of firms based on investors’ responses could have relevant implications in the research area, since it is desirable for firms to improve their business environment by making efforts to obtain positive ESG rating and such responses from the stock market or other capital markets. We investigate the effects of the level and changes in environmental, social and governance (ESG) ratings, developed to represent a firm’s long-term sustainability, on the stock market returns of KOSPI–listed firms in Korea over the period 2011–2018.
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