Quantifying reputational damage: evidence from European banks
Akyildirim et al. examine the financial impact of Corporate Social Irresponsibility (CSI) events on European banks using a dataset of 11,832 reputational shocks from 2007 to 2023. The authors use an EGARCH(1,1) model to analyze the impact of CSI events on bank stock returns and volatility 60 days before to 60 days after the realization of a CSI event. Banks are grouped into quintiles based on various attributes like market capitalization, credit ratings, CSR scores, and deposit levels to examine differential impacts.
Key Findings:
- CSI events lead to significant negative abnormal stock returns and increased volatility for European banks.
- High-severity media coverage and reporting of previously unknown problems increase the magnitude of the negative impact.
- Banks with higher ESG scores experience mitigated impacts, suggesting proactive ESG engagement acts as a buffer against reputational risks.
- Both the largest and smallest banks (by deposit base) are particularly vulnerable to CSI events:
– Largest banks see a -71.5 bp decline around reputational disasters.
– Smaller banks exhibit a -42.0 bp decline over two weeks and -28.2 bp over one month post-event. - Changes in total deposits coinciding with negative CSI news magnify the effect on stock prices and volatility.
- Banks with lower credit ratings and poorer CSR performance face more severe and persistent negative effects. The effects persist over extended periods, indicating lasting uncertainty and ongoing reassessment of affected institutions.
Understanding Reputational Risks: The Impact of ESG Events on European Banks
Authors: Erdinc Akyildirim, Shaen Corbet, Steven Ongena, David Staunton
From: University of Zurich, Dublin City University, Swiss Finance Institute, Central Bank of Ireland
ESG reputation risks and social media
Nicolas et al. explore how shareholders respond to reputational risks related to Environmental, Social, and Governance (ESG) factors, particularly through the lens of social media. The authors focus on how spikes in social media activity regarding ESG issues can affect the financial performance of firms on the S&P 100 index. More specifically, they analyze 114 million tweets about S&P 100 companies from 2016 to 2022, using Twitter’s Academic Research API to collect relevant tweets. Stock prices were sourced from the Center for Research in Security Prices (CRSP) and ESG controversy news was gathered from Refinitiv Eikon, while earnings release dates were obtained from Refinitiv’s Institutional Brokers’ Estimate System (I/B/E/S). Events were defined as unusual spikes in tweet activity about ESG topics. Finally, the authors used a market model to estimate abnormal returns around identified ESG-risk events, focusing on changes in stock prices.
Key findings:
- Overall Impact: ESG-risk events led to a statistically significant average reduction of 0.29% in abnormal returns. This indicates that negative ESG-related discussions on social media can adversely affect stock prices.
- Category-Specific Effects:
– Social and Governance Risks: These categories had the most significant negative impact on stock prices. Specifically, “Product Liability,” “Stakeholder Opposition,” and “Corporate Governance” risks were heavily penalized by shareholders.
– Environmental Risks: Generally did not show a significant impact unless related to “Environmental Opportunities,” which did result in a negative effect on stock prices.
ESG reputation risk matters: An event study based on social media data
Authors: Maxime L.D. Nicolas, Adrien Desroziers, Fabio Caccioli, Tomaso Aste
From: University College London, University of Paris 1 Pantheon-Sorbonne, University of Bologna, LSE
