THE IMPACT OF ESG PERFORMANCE AND EXTERNAL AUDIT OF ESG REPORTS ON STOCK LIQUIDITY

Abstract: Prior research on market reactions to environmental, social, and governance (ESG) factors has predominantly centered around financial performance. In this study we instead shed light on stock liquidity, a previously underexplored dimension of market reactions to ESG. We hypothesize that there is a positive relationship between ESG performance and stock liquidity, and that there is a positive relationship between employing external audit on a standalone ESG report and stock liquidity. We conduct a panel data analysis of publicly traded firms in the U.S. from 2014 to 2021. Our study reveals no evidence supporting the formulated hypotheses. The findings highlight that higher valuations often associated with improvements in ESG may be independent from improvements in stock liquidity. Our study breaks new ground by investigating the complete spectrum of ESG performance and its impact on stock liquidity, providing a unique perspective that goes beyond previous research efforts and contributes to the field of market reactions to ESG.