The Effect of ESG Performance on Share Price Volatility
Abstract: Environmental, Social, and Governance (ESG) investing is growing rapidly. Previous research in the area, has mostly been centered around ESG/CSR and its link to corporate financial performance, cost of capital and idiosyncratic risk. Furthermore, relevant previous research is presented that in part challenges the traditional market models and suggests that total risk is a relevant risk factor, instead of only the systematic risk, as proposed by normative theory. In this study, we develop two separate panel regression models, with separate dependent variables. Realized volatility and a GARCH (1,1) estimate of volatility. This is done in order to gain insight into if there is, as propositioned, a negative relation between high ESG/CSR performance and volatility of the shares, i.e. the total risk of the shares. The study uses ESG and financial data from Thomson Reuters Eikon database. The sample size is 481 firms from the S&P 500 Index, for the years 2009-2016. The results of this study indicate that there is a statistically significant negative relationship between high ESG/CSR performance and share price volatility. This result adds to the discussion that challenges existing theory.
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