Do investors really care about sustainability? Evidence from European companies on the relationship between ESG performance and stock liquidity

This study examines the impact of corporate environmental, social and governance (ESG) performance on capital market efficiency, namely stock liquidity. Drawing on a dataset of 1,693 publicly traded firms across 23 European stock exchanges between 2002 and 2022, we investigate whether companies with stronger ESG credentials benefit from more liquid equity markets. Our results provide strong evidence that ESG performance has a significant positive effect on stock liquidity. This suggests that a substantial portion of European investors today prefer to invest in companies that act environmentally friendly, value social rights and equality, and engage in good governance. Among the three ESG dimensions, the environmental component exhibits the most significant effect, indicating that investors particularly value firms that engage in environmentally responsible practices. Furthermore, the analysis reveals notable regional differences in the importance assigned to ESG factors, showing that investors in Western and Northern European countries show a stronger preference for sustainability-oriented firms compared to their counterparts in Eastern and Southern Europe. These findings highlight the influence of regional economic, cultural, and regulatory contexts on investment behavior. Overall, our study contributes to the growing literature on sustainable finance by underscoring the role of ESG performance not only as a tool for ethical or reputational enhancement but also as a mechanism that can directly improve financial market outcomes. By identifying ESG performance as a determinant of stock liquidity, this research also supports the integration of ESG considerations into investment decision-making and corporate strategy.