Capitalizing on stakeholder theory, we investigate the stock market’s response to companies’ environmental, social and governance (ESG) initiatives in the Thai context. These initiatives are further classified into sustainability, environmental, social and governance (SESG) indicators to capture the market reactions with greater granularity. In particular, this research seeks to determine whether the market reacts significantly to the effectuation of these initiatives.
The Stock Exchange of Thailand Sustainability Investment Index (SET-THSI) recognizes leading companies listed in Thailand’s stock market based on their sustainability efforts. This study specifically focuses on the initiatives undertaken by its constituent companies included in the index between January 2019 and August 2023. Using a sample of 114 companies with a total of 1,124 events, we employed the event study methodology to analyze the market’s response to such initiatives. This approach involves obtaining the difference between expected returns without the event and the actual returns, resulting in a measure known as abnormal returns. These abnormal returns are then aggregated over the event window to obtain cumulative abnormal returns, on which several tests of significance are performed. To investigate how the stock price is affected by the varying impact of SESG initiatives, we conducted a panel regression analysis to explore whether the nature of these initiatives has a statistically significant influence on abnormal returns.
Our findings reveal that the market favors governance-oriented initiatives by reacting more positively toward them than environmental, social or sustainability initiatives. We observed from our further investigation that there exists a significant difference only between governance and sustainability initiatives. Specifically, the market does not appear to react differently to environmental and social initiatives.
The findings carry several important implications for the companies’ strategy and advancement of responsible investments. To foster the growth of responsible investments, companies need to engage in comprehensible and transparent communication with investors regarding the value and outcomes of ESG initiatives; measures should also be undertaken by financial institutions to provide investors with the essential knowledge to comprehend nonfinancial facts. Investors can be given more reliable information to link companies’ ESG outcomes with company value through the enhanced transparency of the sustainability indices.
Previous studies have primarily focused on analyzing the stock price response to ESG initiatives by treating them as a single, combined category. However, limited research has explored whether the market responds differently to various kinds of ESG initiatives. Since shareholders are the primary stakeholders of a company, their response to corporate ESG practices can significantly influence the advancement of corporate ESG performance in Asia. This research contributes to the limited literature on the Asian context by investigating the influence of nonfinancial initiatives on the value of listed companies in an emerging market – Thailand, which presents a distinct setting to examine this question. Unlike some existing studies that have relied upon a broader news events classification, this research performs a detailed categorization procedure to distinguish between various types of ESG and sustainability-related initiatives. The study offers a detailed comprehension of how the market reacts to the different types of events by differentiating between proactive ESG initiatives and sustainability-related initiatives undertaken by firms and validating their sustainability performance to reveal the underlying mechanisms driving investor behavior.
