Evidence on the non-linear relation between ESG and SEO announcement returns

Abstract

This study investigates the non-linear relationship between environmental, social, and governance (ESG) performance (proxied by LSEG ESG data) and short-term market reactions to the announcement of seasoned equity offerings (SEOs) among listed manufacturing firms in the U.S. The event-based design mitigates concerns of reverse causality, which often arise in studies analyzing the relationship between ESG performance and company value. We document evidence of an inverted U-shaped relationship for total ESG and social pillar scores from 2020 to 2023. Environmental pillar scores are negatively associated with market reactions over the same period. The results are insignificant over the period 2016 to 2019. Buy-and-hold abnormal returns (BHARs) and underpricing are not found to be related to ESG performance. The observed non-linear pattern is consistent with interpretations in which moderate ESG engagement is viewed more favorably by investors, whereas very high levels of ESG engagement may be associated with concerns about costs or symbolic activity, inter alia.