The Effect of the ESG Score on Stock Price Jumps : A Quantitative Study on Nordic Countries

Abstract: Sustainability performance of a firm is gaining equal importance as the economic performance in today’s world. Sustainability scores or ESG ratings have successfully emerged to be popular sustainability performance measurements for firms across the globe. Therefore, many studies have been done focusing on relating the firms’ sustainability performance with the financial performance from different aspects in different regions. Other studies have also looked at the relationship between sustainability performance/CSR/ESG and the risks related to the firms. But no study has been found that consider the relationship between ESG/CSR and more extreme stock price movements, i.e., so called stock price jumps, which is an important part of the total risk. To fill this knowledge gap, this study aims to investigate the relationship between firms ESG score, as well as how separate E, S and G scores, relate to stock price jumps.The Nordic countries are chosen as the research area as the four Nordic countries, Sweden, Finland, Denmark, and Norway are ranked among the top five countries in terms of ESG ratings for the last two years. Logically, the investors in these countries should be interested in the firms ESG score as well. Data source for this study is mainly the Thomson Reuters Eikon database. In total 105 companies listed in the Nordic Stock Exchanges have been selected as the sample within the time frame 2008-2017. The findings of this study indicate that, there is no statistically proven significant relationship between firms’ overall sustainability performance or the ESG score and the number of stock price jumps. However, some significantresults have been found at the country levelandforindividual E, S and G scores however. Therefore, individual environmental, social and governance scores have been recommended to be studied by investors before taking any investment decision if they want to reduce the probable stock price jump risk.