Market Reaction to Environmental Controversies: The role of perceived behaviour

Abstract: The rising importance of ESG related issues has been witnessed both by recent literature and surveys. In this paper, we first analyse whether environmental controversies have a significant impact on the involved companies’ stock returns. Secondly, we investigate whether companies’ perceived environmental behaviour influences the market’s reaction. We contribute to the literature by using the environmental pillar score from the year prior to the controversy (lagged E score) as a proxy for perceived environmental behaviour. Our sample consists of 86 controversies involving U.S. public companies in the years 2017-2021. We apply an event study methodology to analyse the cumulative average abnormal returns (CAAR) in an event window spanning from three days before the event date to three days after. The result, although not statistically significant, suggests that there has been a negative reaction following the controversial events visible especially between day 0 and day 2. Subsequently, we compute cumulative abnormal returns (CAR) for each controversy over this period (i.e., between day 0 and day 2), and regress it on the lagged E score. The results shows a positive significant relationship between the lagged E score and CAR suggesting that perceived firm environmental behaviour may function as an anchor from which subsequent events are judged.