Esg Score And Stock Price Synchronization In Indian Market

Abstract

Amongst the many other positive economic consequences of Environmental Social and Governance (ESG) like better financial performance, increased firm value, diminished earnings management etc., lower synchronicity of stock prices draws the special attention of researchers in the recent past. It is mainly due to increasing awareness of the retail and institutional investors on the ESG performance of the companies. The extant literature as evidenced these positive economic consequences of ESG (Gelb and Strawser, 2001, Barnea, Heinkel and Kraus, 2017, Jin, Piggott and Mitchell, 2011, Singh, Sethuraman and Lam, 2017, Eom and Nam, 2017), ESG performance of the firms makes them more resilient to markets risks leading to decrease in beta and increase in alpha values of the stocks. The studies like (Morck, Yeung and Yu, 2000) evidenced that emerging markets experience more stock price synchronicity due to higher correlation among the fundamentals of the companies. Against this backdrop, the present study makes an attempt to test the impact of ESG performance on stock price synchronicity. The study hypothesizes a negative association between ESG performance and stock price synchronicity implying that stocks with comparatively better ESG score are less vulnerable to systematic risk in the market. The present study selects all the constituents of BSE-ESG Index as the sample from the year 2013 to 2019. The data relating to ESG scores are sourced from yahoo.finance.com and other economic variables data has been collected from CMIE prowess database. The results of the analysis revealed a significant negative impact of ESG score of the sample companies on their stock price synchronicity. The results indicate that one unit increase in ESG score results in -0.021 decrease in synchronicity. The results are in line with extant literature (Gelb & Strawser, 2001; Durnev et al., 2004). Results are robust to alternative definitions of synchronicity and ESG scores. So, it can be inferred that reporting of ESG scores of the stock improves the informational efficiency of the stocks and makes then resilient to market risks.