The study explores the relationship between ESG performance and stock prices during the COVID-19 pandemic, particularly focusing on the Chinese market. The rapid growth of ESG investments globally highlights the increasing importance of ESG considerations in investment decisions. While some early literature questioned the financial benefits of ESG practices, suggesting a potential trade-off between ethical and financial performance, recent research has increasingly shown a positive correlation between ESG performance and financial outcomes, including lower downside risks and higher returns. The 2008-2009 financial crisis offered some insights into the role of ESG during crises, with studies indicating that firms with strong ESG performance exhibited better market resilience. However, the specific impact of ESG during the COVID-19 pandemic remained largely unexplored. The COVID-19 crisis, with its severe and widespread economic consequences, provided a unique opportunity to examine the role of ESG in mitigating market volatility. The study aims to fill this research gap by analyzing the impact of ESG performance on Chinese listed firms' stock prices during the COVID-19 outbreak.

The literature review examines the existing research on ESG investing and its impact on stock prices. Early studies, partly influenced by Milton Friedman's views, questioned whether ESG practices represented a misallocation of resources. However, more recent studies have increasingly demonstrated a positive link between ESG performance and financial returns, often attributing this to factors like reduced risk and enhanced portfolio performance. Some studies focus on the relationship between ESG performance and return and risk management, while others highlight the protective role of ESG during economic downturns. Several studies analyzed the impact of ESG during the 2008-2009 financial crisis, showing that firms with better ESG ratings tended to perform better during the crisis. However, the literature lacked specific analysis of ESG's role during the COVID-19 pandemic, motivating this study.

The study employs an event study approach using data from Chinese non-financial A-share listed firms in 2020. ESG data were obtained from China Sino-Securities Index Information Service (Shanghai) Company Limited, while stock prices, firm financial data, and management data were collected from the China Securities Markets and Accounting Research Database. Media coverage data were sourced from the Chinese Research Data Service database. The event date was set as January 20, 2020, when COVID-19 received national attention in China. The event window encompassed 11 days (t-5 to t+5), and the estimation window spanned 175 days (t-210 to t-36). Cumulative abnormal returns (CAR) were calculated using the OLS market model, representing the dependent variable. The ESG score, averaged over four quarters, formed the independent variable. Several control variables, including leverage, profitability, firm size, state-ownership, risk (beta), shareholder structure, board size, CEO duality, board independence, intangible and tangible assets, were incorporated in the regression model. The sample, comprising 2188 observations, excluded financial firms, loss-making firms, firms with insufficient estimation window data and missing values. Continuous variables underwent winsorization at the 1% and 99% levels. The main regression model examines the relationship between CAR and ESG, controlling for the control variables, province fixed effects and industry fixed effects. Further analyses involved subgroup regressions to examine ESG's impact on firms with positive vs. negative shocks, as well as robustness checks varying the event window, ESG proxies, and including additional variables such as cash holdings and institutional ownership. Finally, the study explored potential mechanisms (reputation and insurance effects) and heterogeneous effects based on firm human capital, corporate image, and regional characteristics.

The study's key findings indicate a positive and statistically significant relationship between ESG performance and firms' cumulative abnormal returns during the COVID-19 pandemic in China. This effect was more pronounced among firms experiencing negative shocks, suggesting ESG's role as a protective factor during crises. The positive association between ESG and CAR remained robust across several robustness checks, including variations in event window periods, alternative ESG proxies, exclusion of the most affected Hubei province, and the inclusion of additional control variables. Further analyses identified reputation and insurance effects as key mechanisms driving the positive relationship. Firms with lower reputations and higher operational risks experienced stronger positive impacts from ESG. Heterogeneous effects were also observed based on firm characteristics: The positive effect of ESG on CAR was notably stronger for firms with low human capital, negative public image, and located in regions heavily impacted by COVID-19. Specifically: * **Baseline Regression:** The coefficient for ESG was positive and statistically significant at the 1% level (0.1479), even when controlling for firm characteristics, province, and industry effects. * **Asymmetric Effect:** The positive relationship between ESG and CAR was significantly stronger for firms with negative shocks compared to those with positive shocks. * **Robustness Tests:** Results remained consistent across different event windows, alternative ESG proxies (median of quarterly scores and ESG score in the first quarter of the following year), exclusion of the Hubei sample, and the inclusion of institutional investor ownership and cash holdings as additional control variables. * **Mechanism Tests:** The positive impact of ESG on CAR is partly attributable to reputation and insurance effects. The impact of ESG was stronger among firms with poor reputations and high operational risks. * **Heterogeneous Analysis:** The beneficial effect of ESG was most pronounced for firms with low human capital, negative media coverage, and operations in high-impact regions.

The findings strongly support the view that ESG performance plays a significant role in mitigating downside risk and enhancing stock price resilience during times of financial crisis. The robust positive relationship between ESG and CAR, especially among negatively impacted firms, underscores the value of ESG practices as a risk management tool. The identified mechanisms, reputation and insurance effects, provide valuable insights into how ESG contributes to firm value. The heterogeneous analysis indicates that the impact of ESG is not uniform, being amplified among firms with specific characteristics. These results are consistent with the growing evidence that investors increasingly incorporate ESG factors into their investment decisions, considering them indicators of risk management, sustainability and future performance. The findings contribute significantly to the literature by adding detailed empirical evidence of ESG's role during the COVID-19 pandemic, particularly in a specific context like the Chinese market.

This study offers compelling evidence for the positive influence of ESG performance on stock prices during the COVID-19 pandemic, particularly for firms experiencing negative shocks. The robust findings, across multiple tests and analyses, highlight the importance of ESG as a risk management tool and a signal of resilience. The identified mechanisms (reputation and insurance effects) and heterogeneous effects across firms further enrich the understanding of this relationship. The study's implications are relevant for managers, investors, and policy makers, suggesting that enhancing ESG performance can improve firm value, attract investment, and contribute to economic sustainability. Future research could extend this work by considering smaller firms, analyzing international markets, and exploring other potential mechanisms influencing the ESG-stock price relationship.

The study acknowledges several limitations. The sample primarily includes large, listed Chinese firms, potentially limiting the generalizability of the findings to smaller firms or other countries. The focus on the Chinese market, while insightful given the early and significant impact of COVID-19 there, may restrict the applicability of the results to other contexts. Future research could address these limitations by expanding the sample to include smaller and internationally listed companies, allowing for more robust cross-country comparisons.