The effect of environmental, social, and governance (ESG) performance on the volatility of stock price returns: the moderating role of tax payment

Abstract

Purpose

This study aims to examine how environmental, social and governance (ESG) performance influences stock price volatility, with a specific focus on the moderating role of tax engagement.

Design/methodology/approach

ESG performance is measured by an ESG score calculated from the weighting of three dimensions: environmental, social and governance. Stock price volatility is measured by the degree of stock price variations over 12 months, based on the last 52 weeks’ prices. A sample of French-listed firms in the SBF120 is used, with 770 observations extracted from the 2012–2022 period. The feasible generalized least squares approach is used to eliminate endogeneity and multicollinearity problems.

Findings

The results show that the ESG score negatively impacts stock price volatility, with this impact being more significant in the social dimension than in the environmental and governance dimensions. In addition, the tax payment variable moderates the relationship and increases the effect of the ESG score on stock price volatility. These findings suggest that ESG practices and tax transparency are not only ethical elements but also key components for financial stability, promoting the high-quality development of listed firms.

Research limitations/implications

This study is significant for firms, regulators, policymakers and investors. Overall, it underscores the importance of firms adopting ESG activities and engaging in tax management to mitigate risks and maintain viability in the contemporary business environment.

Originality/value

This study provides new empirical evidence regarding the factors driving corporate stock price volatility. In addition, it offers pertinent policy recommendations for businesses and governments regarding the significance of ESG investments.

Citation

Mechrgui, S. and Theiri, S. (2024), "The effect of environmental, social, and governance (ESG) performance on the volatility of stock price returns: the moderating role of tax payment", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-03-2024-0140