The relationship between ESG performance and stock price crashes : evidence from the United States energy industry

Abstract

This study explores the intricate relationship between environmental, social, and governance (ESG) performance and stock price crashes within the United States energy industry. By employing robust panel data analysis on an extensive dataset spanning nearly two decades, from 2002 to 2021, and examining 666 firm-year observations, this research contributes insights into sustainable investing and risk management. These energy firms, which operate in the fields of oil, gas, coal, and renewable energy, are the focus of this study. Contrary to similar research that suggests a negative association between ESG performance and stock price crash risk, this thesis uncovers a compelling and statistically significant positive relationship in the context of the United States. These findings challenge conventional wisdom, suggesting that firms with robust ESG profiles may, in fact, be more susceptible to stock price crashes within the United States energy industry. Additionally, the research offers insights into the dimensions of ESG that are most influential. Specifically, the environmental and social pillars positively impact crash risk, while the governance pillar and ESG controversies do not exhibit a significant relationship with crash risk. Furthermore, the study also demonstrates that the relationship between ESG performance and crash risk is significantly positive in large firms while insignificant in small firms. This highlights the need for tailored ESG strategies aligned with firm size and industry characteristics, advocating for adaptable sustainable investing approaches across diverse contexts.