Influence of ESG Rating on Stock Price Behavior: Evidence from Malaysian Public-Listed Companies

Abstract

Research Question: Does Environmental, Social, and Governance (ESG) ratings influence the stock price behavior of Malaysian Public Listed companies (PLCs) and which component of ESG has a more significant impact? Motivation: The relationship between ESG and stock performance is intricate and can vary based on factors such as geographical location, firm size, and specific ESG components considered. It is necessary to fully comprehend this relationship and its implications for investors and firms. There is a need to specifically examine the effect of ESG ratings on stock price behaviour of Malaysian PLCs. Idea: This study examines the relationship between ESG disclosures and stock price behaviours. Data: ESG disclosures of 33 Malaysian public-listed companies in the Bloomberg database from 2017 to 2022. Method/Tools: Various static panel estimators, specifically Pooled Ordinary Least Squares (POLS), Fixed Effects (FE), and Random Effects (RE). These models allow us to examine how changes in ESG disclosure affect stock price behavior measured by stock price synchronicity. Findings: Our results reveal that ESG disclosure and its environmental component are negatively associated with stock price synchronicity. Higher levels of ESG and environmental disclosures lead to greater incorporation of firm-specific information into stock prices, resulting in stock prices moving less in tandem with the broader market. Firms with strong ESG and environmental practices thus provide more transparency and specific information to investors, enhancing the informational efficiency of their stock prices. Conversely, social and governance disclosures do not significantly influence stock price synchronicity. As a robustness test, we also find that governance disclosure shows a significant negative relationship with idiosyncratic volatility, suggesting lower firm-specific risk and more stable stock prices. Contributions: This study contributes to new evidence on which components of ESG have a more significant impact on stock price behaviours. These findings underscore the importance of ESG practices in enhancing Malaysian public-listed firms' information environment and financial stability. Overall, the results reinforce the value of integrating ESG considerations into investment strategies.