Unravelling investors’ diverging responses to U.S. firms' global ESG incidents

Abstract

We investigate whether and why investors' reactions to negative ESG incidents in U.S. firms vary by incident locations. We find that, on average, investors react negatively to these ESG incidents; and they react more negatively to domestic ESG incidents compared to international ones. Market negativity increases with closer demographic proximity and higher local social trust. The market reaction remains unaffected by the economic closeness or legal environment of the location. Our empirical evidence remains consistent across various robustness tests. Overall, our findings indicate that investors underreact to global ESG incidents in U.S. firms due to psychological, societal, and institutional factors.