Analysis Of The Mechanism Of ESG Ratings On Cumulative Excess Returns Of Stocks

ESG is a proper noun in responsible investment.The concept of ESG was first proposed by the United Nations Environment Programme in 2004,and is an acronym for the three words environmental,social and governance,reflecting a company’s sense of social responsibility in the three aspects of environmental responsibility,social responsibility and corporate governance,and is a centralized reflection of a company’s non-financial performance.The ESG rating is a quantitative indicator of this sense of social responsibility,and in China,it is mainly engaged by third-party organizations such as China Securities and Wind.In recent years,as the concept of green development and environment-friendly enterprises has become more popular,more and more investors have started to pay attention to the ESG performance of enterprises not only in terms of financial performance,but also in terms of social responsibility,corporate governance and other dimensions.At the same time,in order to implement the "double carbon" policy,regulators have also strengthened their supervision of companies’ performance in environmental and social aspects,and no longer judge companies only by their financial performance.Under the expectation of both regulators and investors,A-share listed companies in China have gradually realized the importance of corporate responsibility nowadays,and have brought corporate environmental governance,social responsibility and corporate governance to the level of corporate strategy,focusing on corporate ESG performance.Based on theories such as efficient market theory,principal-agent theory,and systematic risk,this paper compares the literature to explore the impact of corporate environmental responsibility,social responsibility,and corporate governance on stock prices from the perspective of previous literature and paves the way for the literature.The event study method is also used to study the impact of ESG ratings on the cumulative excess return of stocks for the 2016-2021 period for China’s Ashare CSI 300 and CSI 500 constituent stocks.Through the regression of the benchmark model,we find that for China’s Ashare CSI 300 and CSI 500 constituents,an increase in ESG rating can significantly increase the cumulative excess return of their stocks during the event window,bringing significant excess returns to investors.For robustness reasons,we replace the explanatory variables with the Fama-French three-factor model instead of the CAPM model to estimate the estimated coefficients of individual stocks during the estimation window,and adjust the event window to calculate the cumulative excess return.The empirical results after the replacement all indicate that this effect is significant.Based on this,this paper further investigates the influence mechanism and heterogeneity of ESG rating on cumulative excess return of stocks.partially mediating variable,i.e.,to a certain extent better ESG ratings improve the financial performance performance of firms,which in turn improves their cumulative excess return.In the heterogeneity analysis,the threshold effect of the variable of firm size is tested and established as a double threshold variable in this paper,and the results show that the contribution of ESG rating to cumulative excess return decreases as firm size increases.The analysis shows that this is because the larger the size of the firm,the more complete the disclosure,the more the excess return tends to zero and the standard deviation is significantly smaller,with a more stable return.Based on the above empirical study,this paper makes the following suggestions:ⅰ)vigorously encourage the development of ESG concept products;ⅱ)establish an official ESG rating agency;ⅲ)introduce the ESG assessment concept in the process of corporate IPO.