Abstract
This paper uses novel environmental, social, and governance (ESG) incident news data to study poor ESG practices. I find that firms’ past ESG incident rates predict more incidents, weaker profits, and lower risk-adjusted stock returns. When examining the cause of these abnormal returns, I find analyst forecast errors as well as lower returns around earnings announcements and subsequent incidents. Moreover, incident rates predict stronger abnormal returns in firms with higher short-term ownership, higher valuation uncertainty, and lower investor attention. Overall, these findings suggest that poor ESG practices negatively impact long-term value, which is not fully reflected in stock prices.
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