Corporate Sustainability and Stock Returns: Evidence from Employee Buy-in to Senior Management

Abstract

Corporate commitment to ESG, often established by senior managers, has increased dramatically in recent years. We examine the relationship between firm ESG performance and shareholder value under various levels of employee ratings of senior management. Using calendar-time portfolio stock returns and firm-level panel regressions, we find that firms with high ratings on both ESG and employee opinions of senior management provide significantly higher future stock returns than those with low ratings on both. These firms also outperform the firms with high ESG or high employee opinions alone. We note that ESG (or social) rating and employee opinions of senior management have little correlation, which suggests that the two are not related signals. Overall, our results suggest that ESG enhances firm value when there is employee buy-in to senior managers and have implications for asset managers who integrate ESG factors and firm managers who make ESG investments and manage human capital.