Stock Market Reactions and ESG disclosure in the Context of Negative ESG Events

This paper analyses stock market reactions after the occurrence of major negative corporate environmental, social or governance (ESG) events and the possibility of mitigating these effects through the upfront provision of ESG information in firms’ annual reports. For this purpose, we follow a three-step procedure. First, we analyse the major ESG-related events gathered from REPRisk® data via event study analysis. Herein, we cover a window of 2 to 21 days. Second, we collect all annual reports of the firms mentioned in the covered period over the entire time horizon and conduct a textual analysis to examine firms’ disclosure of ESG information. Finally, we draw conclusions from the two approaches and show that firms with more upfront ESG information are better protected against negative market reactions after the occurrence of a negative ESG event. Specifically, we show that for firms with more upfront ESG disclosure, the market reactions are more positive. Our results also confirm that such events leads to an adjustment of the subsequent year’s ESG disclosure in the annual reports.