ESG performance and stock prices: evidence from the COVID-19 outbreak in China

The study examines whether firms’ ESG performance serves as a valuable signal that mitigates downside risk and supports stock price resilience during the COVID-19 crisis. Motivated by mixed evidence on ESG’s financial value and the unique shock of the pandemic, the authors investigate if, how, and for which firms ESG performance translates into higher cumulative abnormal returns (CAR) around the COVID-19 outbreak. The context is China, which experienced early and severe disruptions and swift containment measures, making it a pertinent setting to assess ESG’s role in crisis-driven stock price movements. The purpose is to quantify the ESG–CAR relationship, assess asymmetries by risk exposure, and identify mechanisms (reputation and insurance) through which ESG affects prices. The study highlights the importance of ESG as a risk management, non-financial performance, and sustainability indicator that may reduce price volatility during crises.

Prior work offers competing views on ESG’s financial impact. Early perspectives inspired by Friedman argue ESG may misallocate corporate resources, with some evidence suggesting ethical investors accept suboptimal financial performance for social goals. Subsequent studies present mixed results: some find investors reallocate toward high-sustainability funds without consistent outperformance and that ESG does not insure against downside risk; others document lower downside risks, reduced exposure to risk factors, and outperformance of high-ESG portfolios, particularly during crises. Evidence from the 2008–2009 financial crisis indicates ESG can improve transparency, mitigate information asymmetry, and enhance market liquidity and fund performance. COVID-19 triggered sharp market-wide declines with heterogeneous firm impacts, suggesting ESG’s role may depend on exposure to shocks. This study extends the literature by focusing specifically on COVID-19 in China, evaluating ESG’s effect on CAR, its asymmetries across firms and industries, and testing mechanisms (reputation and insurance).

Data comprise Chinese non-financial A-share listed firms in 2020. ESG scores are obtained from China Sino-Securities Index Information Service (Shanghai), stock prices and firm financials from the China Securities Markets and Accounting Research (CSMAR) database, and media coverage from the Chinese Research Data Service database. The dependent variable is cumulative abnormal return (CAR) estimated via an event study around the COVID-19 disclosure shock. Event study setup: event date = January 20, 2020 (national recognition and policy action on COVID-19); event window = t−5 to t+5; estimation window = t−210 to t−36; expected returns via OLS market model. Abnormal returns ARt = Rt − ERt; CAR is summed over the event window. ESG performance is measured as the average of quarterly ESG scores over the year (also alternative proxies: median quarterly ESG and Q1 of t+1). Controls follow prior literature: leverage (Lev), profitability (Roa), firm size (Size), state ownership (Soe), market beta (Bate), ownership concentration (Top1), board size (Board), CEO–chair duality (Dual), independent director proportion (Independ), intangible assets (Intangible), tangible assets (Tangible). Empirical specification: cross-sectional OLS of CAR on ESG with province and industry fixed effects and the control vector. Sample selection excludes financial firms, loss-making and specially treated firms, observations with <175 trading days in the estimation window, and those with missing data; continuous variables are winsorized at 1% and 99%; final N = 2,188. Risk exposure analyses classify firms into positive/negative shock groups by (a) sign of CAR (above/below zero) and (b) industry classification (positive: information technology, medicine manufacturing; negative: tourism, transportation, restaurants, wholesale/retail, real estate, export manufacturing). Mechanism tests: reputation measured by positive online media reports (New1) and positive financial newspaper reports (New2), both in logs; insurance effect measured by operating risk via the 5-year standard deviation of sales (Risk1) and its industry-adjusted version (Risk2). Interaction terms ESG×New1/New2 and ESG×Risk1/Risk2 assess mechanism channels. Heterogeneity tests split samples by human capital intensity (Labor = employees/sales; above/below median), corporate image (Bad_image = number of negative online media reports; above/below median), and regional impact (high-impact provinces: Hubei, Hunan, Henan, Jiangxi, Anhui, Guangdong, Zhejiang vs. others). Robustness checks include alternative event windows ([-3,3], [-7,10], [-7,11], [-7,14]), alternative ESG proxies, excluding Hubei, and adding institutional ownership and cash holdings.

- Baseline effect: ESG is positively associated with CAR during COVID-19. Without firm controls, ESG coefficient = 0.1479 (t=3.507; 1% level); with controls, ESG coefficient = 0.1316 (t=2.777; 1% level). R-squared rises from 0.114 to 0.149. Size positive; leverage negative; beta positive; tangible assets negative; duality weakly positive. - Asymmetry by risk exposure: ESG effect is significant only among firms facing negative shocks/high risk exposure. By CAR sign grouping: high-risk (negative) group ESG coeff not significant (-0.0550), low-risk (positive) group ESG coeff = 0.0927 (t=3.565; 1%). By industry grouping: high-risk industries ESG coeff = 0.0387 (ns), low-risk industries ESG coeff = 0.2195 (t=2.206; 5%). The narrative emphasizes stronger ESG benefits where downside risks are larger. - Robustness: Results hold under alternative event windows: [-3,3] ESG=0.0752 (t=2.819; 1%); [-7,10] ESG=0.1327 (t=2.697; 1%); [-7,11] ESG=0.1322 (t=2.827; 1%); [-7,14] ESG=0.0994 (t=1.912; 10%). Alternative ESG proxies: average ESG remains positive and significant with alternative specifications; median quarterly ESG (ESG1) and Q1 next-year ESG (ESG2) specifications also support the main result. Excluding Hubei: ESG=0.1239 (t=2.761; 1%). Adding institutional ownership and cash holdings: ESG remains positive and significant (~0.1363; t=2.93). - Mechanisms: • Reputation effect: ESG positively relates to reputation measures (coefficients on New1 and New2 are significantly positive), and interactions ESG×New1 and ESG×New2 are significantly negative (e.g., New1_ESG = −0.0903, t≈−2.24; New2_ESG ≈ 0.083–0.087 positive in table labeling but text interprets enhanced impact where reputation is lower), indicating ESG’s marginal contribution to CAR is greater among firms with lower existing reputation. • Insurance effect: Operating risk measures negatively relate to CAR (Risk1=−0.7054; Risk2=−0.0671), while interactions ESG×Risk1 and ESG×Risk2 are significantly positive (e.g., 0.7086 and 0.0675), implying ESG’s benefit is stronger for high-risk firms. - Heterogeneity: • Human capital: ESG effect significant for low human capital firms (ESG=0.2350; t=3.672; 1%), not significant for high human capital firms (ESG=0.0321; ns). • Corporate image: ESG significant for firms with many negative media reports (ESG=0.2104; t=3.308; 1%), not significant for those with few negative reports (ESG=0.0323; ns). • Regional impact: ESG significant in high-impact regions (ESG=0.1465; t=2.418; 5%), not significant in low-impact regions (ESG=0.0953; ns).

The findings demonstrate that higher ESG performance is associated with higher cumulative abnormal returns around the COVID-19 event, indicating that investors may interpret ESG as a credible signal of superior risk management and resilience under systemic shocks. The asymmetric effects—stronger where downside risk is higher (negative shock groups, bad image, low human capital, high-impact regions)—support the view that ESG primarily mitigates downside exposure rather than enhancing upside potential. Mechanism tests suggest two channels: (1) reputation, whereby ESG enhances corporate visibility and stakeholder goodwill, contributing to more favorable price reactions (especially where baseline reputation is low); and (2) insurance, where ESG aligns with practices that reduce operational risk exposure and stabilize expectations, leading to better CARs for riskier firms. These results advance the literature by providing crisis-specific evidence from China, reinforcing ESG’s role in impression and risk management, and clarifying conditions under which ESG most effectively protects shareholder value.

The study shows that during the COVID-19 crisis, firms with higher ESG performance experienced higher CARs, evidencing stock price resilience tied to ESG. The impact is asymmetric and more pronounced where downside risks are greater. Reputation enhancement and insurance effects are key mechanisms through which ESG influences stock prices. Heterogeneity analyses reveal stronger ESG benefits among firms with low human capital, poorer public image, and in regions more severely impacted by the pandemic. The findings suggest managers should enhance ESG practices as a value- and risk-enhancing strategy, investors should incorporate ESG into decision-making to improve risk-adjusted returns, and policymakers should encourage ESG disclosure and adoption. Future research could extend to small and medium-sized firms, cross-country settings, and developed markets to test external validity and institutional influences on ESG effects.

- The sample includes only large Chinese A-share listed firms; results may not generalize to small and medium-sized enterprises, for which resource constraints could alter ESG effects. - The focus on China limits external validity; institutional and market differences may change ESG–performance relationships in developed countries or international contexts. - ESG data are quarterly and aggregated to annual measures; although robustness checks use alternative proxies, measurement error concerns remain. - Event-study windows and model choices, while standard, may not capture all confounding market dynamics around the pandemic shock.