Sustainable success: How high ESG ratings affect stock market responses to earnings surprises

Using a broad sample of earnings announcements by firms with available Thomson Reuters Refinitiv ESG ratings data, we find more pronounced stock market reaction to earnings announcements by firms with higher ESG ratings. We interpret this as evidence consistent with the information credibility hypothesis as opposed to the information preemption hypothesis. We further examine the stock market response to negative earnings news and find that the stock market responds more favorably to negative earnings news for firms with higher ESG ratings, consistent with the resiliency hypothesis of such firms. Finally, we investigate how ESG ratings interact with institutional ownership to shape the stock market response to earnings news. We find that firms with higher ESG ratings appeal more to long-term institutional investors who are less likely to trade around short-term earnings news. This in turn leads to more muted stock reaction at announcement times. Our findings highlight important economic benefits of sound ESG practices.