The Role of ESG Ratings on Stock Market Responses to Environmental Fines
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2025-07-04
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en
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This study examines how Environmental, Social, and Governance (ESG) ratings influence stock returns and volatility levels following an environmental penalty. The analysis compares two key mechanisms: the commitment effect, in which ESG ratings mitigate negative market reactions due to a firm’s long-term orientation, and the values betrayal effect, in which ESG ratings amplify penalties due to unmet expectations.
The analysis is based on a sample of 91 U.S.-based firms which incurred an environmental fine between 2002 and 2023. The Cumulative Abnormal Returns (CARs) are calculated using the Carhart four-factor model.
The results show that high-ESG firms experience significantly larger negative CARs than low-ESG firms, pointing towards the values betrayal effect. On the other hand, the regression analysis mainly captures insignificant results, highlighting the contingent framework of ESG ratings: ESG ratings do not uniformly protect or amplify stock market reactions. The volatility analysis, based on a GARCH (1,1) model, reveals an insignificant greater increase in volatility levels for high-ESG firms compared to low-ESG firms.
The core insight is the heterogeneous impact of ESG ratings on both return and volatility following an environmental fine, challenging the assumption that ESG ratings shape consistent market responses.
Keywords: ESG, Environmental Fines, Cumulative Abnormal Return (CAR), Carhart Four-Factor Model, Event Study, GARCH Model.
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Faculteit der Managementwetenschappen