Abstract
This paper contributes to the understanding of the relation between the environmental and social positioning of companies and the financial resilience in the specific context of the COVID-19 crisis. Resilience is measured through two dimensions based on stock price data: the severity of loss which captures the stability and the duration of recovery which captures the flexibility dimension. Using a sample of 1508 US based firms, we provide evidence that firms with high environmental and social (ES) rating were more resilient than low ES rating firms during the COVID-19 pandemic by lessening the severity of price drop and recovering faster. This effect is enhanced by using a non-linear approach based on quantiles. Further, we provide evidence that the effect of ES on resilience is focused on the environmental and social components. Interestingly, we show that management and shareholders sub-categories of the governance rating, have no impact on firm’s time to recovery during pandemic crisis.
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Notes
Source: COVID-19: Implications for business in 2020; December 16, 2020.
Blackrock, the largest active investor in the world reported better risk-adjusted performance across sustainable investment products for the first quarter of 2020 (Blackrock 2020). Morningstar claimed that 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts (Hale; 2020). MSCI boasted that all four of their ESG-oriented indices outperformed a broad market counterpart index (Nagy and Giese 2020).
Refinitiv also provides the ESG combined score which is an evaluation of a company’s ESG performance based on the reported information in the ESG pillars, with ESG controversies overlay captured from global media sources. Since we can not disentangle the ESG combined score into pillars, we settle for replicating our analysis with the ESG combined and find simlar results (Results are available on the supplementary materials).
One month later, prices declined by almost 30%.
In Sect. 4.3.3, we replicate our analysis using extended windows to the first and second quarter of 2021 and found similar results.
In Sect. 4.3.2, we replicate our analyses using ES measured at year-end 2018, 2020 and 2021. Most of our findings continue to hold.
We dropped 787 stocks for which prices are missing to compute resilience measure. The ES scores of 150 stocks were also unavailable, which deepened the sample size reduction. We also excluded stocks for which the control variables were unavailable. Table 12 provides all details of the sample construction.
Refinitiv classifies firms according to the ESG scores. A score above 0.5 indicates good ESG performance and above average degree of transparency in reporting ESG data publicly.
In all our regressions, we implement the Variance Inflation Factor test (VIF) for the mutlicolinearity issue. Our results show that all variables overcome the multicolinearity concerns which would not affect the regression results.
We thank the referees for highliting the importance that instruments should not be related to size effect.
In Refinitiv Datastream, Policy Board Independence variable answers the question whether the company have a policy regarding the independence of its board by taking into accounttwo dimensions: (1) the company strives to maintain a well-balanced board through an adequate number of independent board members and (2) independent board members maintain integrity and independence in decision making.
The Cox model is semi-parametric while Exponential, Weibull and Gompertz are parametric.
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Acknowledgements
We are very grateful to participants at the 2022 Financial Economic Meeting, 2023 Conference on Financial Markets and Corporate Governance in Australia, 2023 Association Française en Finance Conference in Bordeaux, 2023 Financial Management Association in Denmark, 2023 European Financial Management Conference in United Kingdom and seminar series at the University of Lille and Bucharest University for useful comments and suggestions.
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Ameur, H.B., Boussetta, S. Do environmental and social practices matter for the financial resilience of companies? Evidence from US firms during the COVID-19 pandemic. Rev Quant Finan Acc (2023). https://doi.org/10.1007/s11156-023-01218-4
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DOI: https://doi.org/10.1007/s11156-023-01218-4