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The combined impact of ESG and Sharia compliance in mitigating stock price crash risk

Author

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  • Nur Fitriana Hamsyi
  • Fuad Rakhman
  • Singgih Wijayana

Abstract

PurposeThis study investigates the combined impact of Environmental, Social, and Governance (ESG) performance and Sharia compliance on stock price crash risk.Design/methodology/approachWe employ fixed-effects regression models to test hypotheses using unbalanced panel data from non-financial public firms listed on the Indonesia Stock Exchange from 2014 to 2022. Additional robustness tests are conducted to validate the main findings.FindingsThe results indicate that ESG performance alone is not associated with stock price crash risk, suggesting it does not contribute to risk mitigation. However, further analysis demonstrates that the benefit of ESG performance in mitigating stock price crash risk appears when we include Sharia compliance in our regression model.Practical implicationsThe findings offer valuable insights for stakeholders, particularly investors, firms, and policymakers, to consider the combination of ESG performance and Sharia compliance as an effective mechanism to mitigate the stock price crash risk.Originality/valueResearch on the interplay between ESG performance and Sharia compliance in mitigating stock price crash risk remains scarce, notably in developing markets such as Indonesia. To the best of our knowledge, this study provides the first empirical evidence highlighting the significance of Sharia compliance in reinforcing the role of ESG performance in mitigating stock price crash risk.

Suggested Citation

  • Nur Fitriana Hamsyi & Fuad Rakhman & Singgih Wijayana, 2025. "The combined impact of ESG and Sharia compliance in mitigating stock price crash risk," Pacific Accounting Review, Emerald Group Publishing Limited, vol. 37(4), pages 636-660, August.
    • Handle: RePEc:eme:parpps:par-10-2024-0266
    DOI: 10.1108/PAR-10-2024-0266
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