Risk Mitigation of Corporate Social Performance in US Class Action Lawsuits. Issue 2 (3rd April 2021)

• Record Type: Journal Article
• Authors: Fauser, Daniel V.; Utz, Sebastian
• Is Part Of: Financial analysts journal. Volume 77:Issue 2(2021)
• Page Start: 43
• Page End: 65
• Publication Date: 2021-04-03
• Subjects: Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.1080/0015198X.2020.1861896
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract : We investigated the relationship between corporate environmental, social, and governance (ESG) performance and litigation risk by examining US class action lawsuits. We found that a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%. Moreover, an average company with low ESG performance exhibited a loss in market value twice as large as that of a company with high ESG performance—an abnormal loss of US$1.14 billion. Implementation of our findings with a trading strategy yielded positive monthly alphas, suggesting that investors benefit from lower litigation risk and the insurance-like protection of high ESG performance. Abstract : Disclosure: The authors report no conflicts of interest. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Editor's note: Submitted 24 April 2020 Accepted 1 December 2020 by Stephen J. Brown. This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Jie Cao and one anonymous reviewer were the reviewers for this article.