Environmental, Social, and Governance (ESG) Profiles, Stock Returns, and Financial Policy: Australian Evidence

AuthorManapon Limkriangkrai,Robert B. Durand,SzeKee Koh
Published date01 September 2017
Date01 September 2017
Environmental, Social, and
Governance (ESG) Profiles, Stock
Returns, and Financial Policy:
Australian Evidence*
Department of Banking and Finance, Monash Business School, Monash University,
Melbourne, VIC, Australia,
Singapore Institute of Technology, Singapore and
Department of Finance and Banking, Curtin University, Perth, WA, Australia
This study investigates the independent effects of environmental (E), social
(S), corporate governance (G), and the composite ESG ratings on stock returns
and corporate nancing decisions of the largest stocks in the Australian equity
market. Firms with high composite ESG ratings tend to increase their leverage.
For the individual ratings, we nd different inferences: rms with low E and
high G ratings tend to raise less debt. Firms with high G ratings hold less cash,
while those with low G ratings have lower dividend payouts. S ratings have no
impact on corporate nancing decisions. There appears to be no signicant
difference in risk-adjusted returns for portfolios based on ESG ratings, effec-
tively indicating that there is no cost of ESG investment.
JEL Codes: G34; D71
There is an increasing research interest in the rationale behind environmental,
social, and governance (ESG) activities undertaken by rms. Environmental (E)
activities involve a rm's efforts to make a positive impact on the environment,
through compliance with existing regulations and recognition of future impacts.
Social (S) activities refer to equitable treatment ofclose stakeholders and protection
of the social eco system in which the rm operates. Governance (G) incorporates
rm ethics andintegrity,including principles suchas transparency and fair dealing,
and effectivefunctioning of the board of directors.A rm's ESG activities areimpor-
tant because both institutional and individual investors now recognize that ESG
represents opportunities and risks facing the rm. Investors use nonnancial data
such as ESG factors to decide whether to invest in a rm (Coleman et al. 2010). In
* The asset-pricing factors were kindly made available by Philip Gray. We also thank the anonymous
referee and Philip Gray for their valuable comments.
© 2016 International Review of Finance Ltd. 2016
International Review of Finance, 17:3, 2017: pp. 461471
DOI: 10.1111/ir.12101

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