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ESG activities and stock liquidity

Author

Listed:
  • Fu, Mengchuan
  • Meles, Antonio
  • Salerno, Dario
  • Yan, An

Abstract

This study examines how environmental, social, and governance (ESG) activities influence stock liquidity using a panel of European listed firms from 2003 to 2019. We distinguish between ESG performance and ESG controversies to capture both proactive sustainability engagement and negative ESG shock events. We find that higher ESG performance is associated with improved liquidity, whereas ESG controversies significantly impair it, indicating asymmetric market reactions to positive versus negative ESG information. The evidence is consistent with a framework in which ESG activities shape firms’ information environment and investor participation, thereby affecting trading frictions. Environmental practices are associated with lower risk-related uncertainty, social practices with more stable investor participation, and governance practices with reduced information asymmetry. We further find that voluntary ESG disclosure improves liquidity, especially for firms facing high information asymmetry. To strengthen identification, we employ change analysis, Granger causality tests, instrumental variables, Heckman selection correction, and a staggered difference in differences design based on shifts in ESG salience. Overall, the findings suggest that ESG-related information materially affects market liquidity through economically distinct channels.

Suggested Citation

  • Fu, Mengchuan & Meles, Antonio & Salerno, Dario & Yan, An, 2026. "ESG activities and stock liquidity," Journal of Financial Stability, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:finsta:v:84:y:2026:i:c:s1572308926000306
    DOI: 10.1016/j.jfs.2026.101528
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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

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