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Behavioral reactions to ESG sentiment: Evidence from heterogeneous Asia-pacific markets

Author

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  • Liu, Jia
  • Chang, Hao-Wen
  • Lin, Chih-Yung
  • Yen, Pi-Hsia

Abstract

This study examines how Asia-Pacific markets respond to environmental, social, and governance (ESG) information and its effect on corporate leverage. Apart from a general backward-looking rating, we adopt a novel database, Refinitiv's MarketPsych, to proxy timely investors' sentiment toward firms' ESG. Using panel data spanning 2005–2021, we find that firms’ ESG increases leverage by about 1.3 percent. This effect is mainly dominated by developed economies such as Japan, Hong Kong, and Singapore. To alleviate endogenous concerns, we implement a quasi-experiment encompassing the 2015 Paris Agreement. Defining a firm with an ESG score over the median as treatment, we show that treated firms significantly increase leverage after the agreement, indicating increased investor sensitivity to sustainability. Among ESG pillars, environmental and governance factors have a stronger influence than social factors. Our findings emphasize the role of behavioral mechanisms and institutional context in shaping the relationship between ESG performance and capital structure decisions.

Suggested Citation

  • Liu, Jia & Chang, Hao-Wen & Lin, Chih-Yung & Yen, Pi-Hsia, 2025. "Behavioral reactions to ESG sentiment: Evidence from heterogeneous Asia-pacific markets," Finance Research Letters, Elsevier, vol. 85(PD).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pd:s154461232501459x
    DOI: 10.1016/j.frl.2025.108204
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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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