IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v53y2023ics1544612322005797.html
   My bibliography  Save this article

Stock market reaction to mandatory ESG disclosure

Author

Listed:
  • Wang, Jiazhen
  • Hu, Xiaolu
  • Zhong, Angel

Abstract

Employing an event-study approach, we examine stock market reaction to the enactment of the Environmental, Social and Governance (ESG) Disclosure Simplification Act of 2021 by the United States House of Representatives. The Act mandates disclosure of standardized ESG metrics among American public companies. A significantly negative reaction of -1.1% is documented across all firms, which does not recover until the fifth day. Carbon-intensive firms and industries are more vulnerable to the negative market reaction. The negative reaction attenuates among firms with higher ESG scores.

Suggested Citation

  • Wang, Jiazhen & Hu, Xiaolu & Zhong, Angel, 2023. "Stock market reaction to mandatory ESG disclosure," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322005797
    DOI: 10.1016/j.frl.2022.103402
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612322005797
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2022.103402?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. David O. Lucca & Emanuel Moench, 2015. "The Pre-FOMC Announcement Drift," Journal of Finance, American Finance Association, vol. 70(1), pages 329-371, February.
    2. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, August.
    3. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    4. Bennear, Lori S. & Olmstead, Sheila M., 2008. "The impacts of the "right to know": Information disclosure and the violation of drinking water standards," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 117-130, September.
    5. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    6. Hariom Manchiraju & Shivaram Rajgopal, 2017. "Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013," Journal of Accounting Research, Wiley Blackwell, vol. 55(5), pages 1257-1300, December.
    7. Ginger Zhe Jin & Phillip Leslie, 2003. "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 409-451.
    8. Nelson, Karen K. & Price, Richard A. & Rountree, Brian R., 2008. "The market reaction to Arthur Andersen's role in the Enron scandal: Loss of reputation or confounding effects?," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 279-293, December.
    9. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    10. Magali A. Delmas & Michael W. Toffel, 2008. "Organizational responses to environmental demands: opening the black box," Strategic Management Journal, Wiley Blackwell, vol. 29(10), pages 1027-1055, October.
    11. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    12. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    13. Tiziana Russo-Spena & Marco Tregua & Alessandra De Chiara, 2018. "Trends and Drivers in CSR Disclosure: A Focus on Reporting Practices in the Automotive Industry," Journal of Business Ethics, Springer, vol. 151(2), pages 563-578, August.
    14. Lars Hornuf & Gül Yüksel, 2022. "The Performance of Socially Responsible Investments: A Meta-Analysis," CESifo Working Paper Series 9724, CESifo.
    15. Hendrik Bessembinder & Michael J Cooper & Feng Zhang, 2019. "Characteristic-Based Benchmark Returns and Corporate Events," Review of Financial Studies, Society for Financial Studies, vol. 32(1), pages 75-125.
    16. He, Feng & Qin, Shuqi & Liu, Yuanyuan & Wu, Ji (George), 2022. "CSR and idiosyncratic risk: Evidence from ESG information disclosure," Finance Research Letters, Elsevier, vol. 49(C).
    17. Jody Grewal & Edward J. Riedl & George Serafeim, 2019. "Market Reaction to Mandatory Nonfinancial Disclosure," Management Science, INFORMS, vol. 65(7), pages 3061-3084, July.
    18. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    19. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
    20. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Hu & Shen, Hong & Li, Shouwei, 2023. "ESG performance and stock price fragility," Finance Research Letters, Elsevier, vol. 56(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    2. Jody Grewal & Edward J. Riedl & George Serafeim, 2019. "Market Reaction to Mandatory Nonfinancial Disclosure," Management Science, INFORMS, vol. 65(7), pages 3061-3084, July.
    3. Al-Hadi, Ahmed & Taylor, Grantley & Hossain, Mahmud, 2015. "Disaggregation, auditor conservatism and implied cost of equity capital: An international evidence from the GCC," Journal of Multinational Financial Management, Elsevier, vol. 29(C), pages 66-98.
    4. García-Sánchez, Isabel-María & Noguera-Gámez, Ligia, 2017. "Integrated information and the cost of capital," International Business Review, Elsevier, vol. 26(5), pages 959-975.
    5. Basu, Debarati & Sen, Kaustav, 2022. "Organizational form and access to capital: The role of regulatory interventions," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    6. Louise Yi Lu & Greg Shailer & Yangxin Yu, 2017. "Corporate Social Responsibility Disclosure and the Value of Cash Holdings," European Accounting Review, Taylor & Francis Journals, vol. 26(4), pages 729-753, October.
    7. David DeBoskey & Peter Gillett, 2013. "The impact of multi-dimensional corporate transparency on us firms’ credit ratings and cost of capital," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 101-134, January.
    8. Ozdagli, Ali & Velikov, Mihail, 2020. "Show me the money: The monetary policy risk premium," Journal of Financial Economics, Elsevier, vol. 135(2), pages 320-339.
    9. Flora Mui¤o V zquez & ?Marco Trombetta, 2007. "Does graph disclosure bias reduce the cost of equity capital?," "Marco Fanno" Working Papers 0039, Dipartimento di Scienze Economiche "Marco Fanno".
    10. Michael Greenstone & Paul Oyer & Annette Vissing-Jorgensen, 2006. "Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 399-460.
    11. Allaya, Manel & Derouiche, Imen & Muessig, Anke, 2022. "Voluntary disclosure, ownership structure, and corporate debt maturity: A study of French listed firms," International Review of Financial Analysis, Elsevier, vol. 81(C).
    12. Xue, Shuyu & Chang, Qi & Xu, Jingwen, 2023. "The effect of voluntary and mandatory corporate social responsibility disclosure on firm profitability: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    13. Shan Zhou & Roger Simnett & Wendy Green, 2017. "Does Integrated Reporting Matter to the Capital Market?," Abacus, Accounting Foundation, University of Sydney, vol. 53(1), pages 94-132, March.
    14. Luzi Hail & Christian Leuz, 2006. "International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?," Journal of Accounting Research, Wiley Blackwell, vol. 44(3), pages 485-531, June.
    15. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Discussion Paper 2005-67, Tilburg University, Center for Economic Research.
    16. Aslan, Hadiye & Easley, David & Hvidkjaer, Soeren & O'Hara, Maureen, 2011. "The characteristics of informed trading: Implications for asset pricing," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 782-801.
    17. Hsin-Yi Yu & Li-Wen Chen, 2017. "Ambiguous Customer Identity Disclosure and the Cost of Equity Capital," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-29, September.
    18. Nikolaev, V. & van Lent, L.A.G.M., 2005. "The endogeneity bias in the relation between cost-of-debt capital and corporate disclosure policy," Other publications TiSEM 04869b30-e8a9-4ecf-84ae-6, Tilburg University, School of Economics and Management.
    19. Liu, Xufeng & Wan, Die, 2023. "Retail investor trading and ESG pricing in China," Research in International Business and Finance, Elsevier, vol. 65(C).
    20. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.

    More about this item

    Keywords

    Event study; ESG disclosure; Nonfinancial disclosure; Climate-related financial risks; Mandatory disclosure;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322005797. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.