The impact of ESG news on the volatility of the Portuguese stock market—Does it change during recessions?

Abstract

This paper assesses how environmental, social, and governance (ESG) news influence Portuguese stock market volatility depending on the business cycle. Given the lack of an adequate index to capture the effects of ESG media on the Portuguese stock market, a News Sentiment Index is developed. This index, which captures positive and negative ESG news on companies listed in the Portuguese Stock Index (PSI‐20), is then used as an external regressor in symmetric and asymmetric GARCH‐type models employed to model the stock market volatility. Results show that during non‐crisis periods ESG news reduce returns' volatility, and that when considering the period preceding the financial crisis the disclosure content (positive or negative) of the news matter. However, during economic downturns, neither the amount nor the content disclosure of ESG news affect volatility; thus, ESG preoccupations might no longer be paramount.

The Influence of Environmental, Social, Governance, and Corporates Scandals on the Stock Volatility

“…However, the results of this study explain that corporate scandal has no influence on stock price volatility. This does not support signal theory and the efficient market hypothesis theory, and is not in line with research by Sandu (2023), Zanatto et al (2023), Cui & Docherty (2020), and Glasserman & Mamaysky (2019), which states that corporate scandal has an influence on increasing share price volatility.…”

“…This ultimately contributes to an increase in the volatility of a company's shares, which reflects the risk level of the shares in the market. This is evidenced by research by Sandu (2023) and Zanatto et al (2023) who found that ESG controversy and ESG news with negative sentiment had an influence on increasing stock volatility. However, further research is required, especially on the Indonesian stock market, which is still in its developing stage (emerging market) to deeply understand this phenomenon.…”