Stock market reaction to COVID-19 outbreak: evidence from ESG firms in emerging economies

This study explores the stock market reaction to the onset of the COVID-19 pandemic using a unique dataset with a multi-country and multi-industry sample containing 1,313 Environmental, Social, and Governance (ESG) firms from 25 leading emerging countries across four regions: the Americas, Europe, Middle East and North Africa (MENA), and Asia. The study employs an event study methodology to investigate the effects of COVID-19 in response to its classification as a public health emergency and subsequent declaration as a worldwide pandemic. The results show that significant negative stock abnormal returns occurred in response to the two COVID-related announcements at both the country and regional levels. We report similar results when utilizing an alternative benchmark index that corresponds to the countries’ specific primary indices in lieu of the MSCI Emerging Markets ESG Leaders Index. Further, we investigate the drivers of stock abnormal returns via a cross-sectional regression analysis with robust standard errors using two sets of ESG rating scores from Refinitiv and Bloomberg. We report a significant impact of both the Refinitiv and Bloomberg ESG scores on cumulative abnormal returns (CARs) and argue that ESG scores are the most significant drivers of cross-sectional CARs. Firm size and cash affected abnormal returns in response to the global pandemic but in different event windows. Our main findings reveal that the efficient market hypothesis does not hold, ESG ratings are the main drivers of abnormal returns, and both Refinitiv and Bloomberg ESG ratings provide consistent results. Hence, our results hold across robustness checks.