ESG in the headlines: Media-driven reputational risk and stock performance

Abstract

This study examines the impact of environmental, social, and governance (ESG) reputational risks on stock performance. We use a unique dataset of media-driven ESG reputational risk indicators, covering 4963 Chinese firms from 2009 to 2023. On average, a one-standard-deviation increase in ESG reputational risks is associated with a 4.5 % decrease in simple stock returns, a 14.5 % reduction in excess stock returns relative to the market index, and a 12.2 % decline in excess stock returns compared to peer firms of similar size. These negative effects contradict the traditional risk-return relationship predicted by risk premium theory. Further analysis identifies reduced investor confidence and tighter financing constraints as key mechanisms through which ESG reputational risks negatively affect stock returns. Heterogeneity analyses indicate that the negative impact is more pronounced for firms in non-pollution-intensive industries, those facing financing difficulties, and those exposed to environment-related reputational risks.