Himori

Journal of
Risk and Financial

Management
Article
ESG Disclosures and Stock Price Crash Risk
Rio Murata and Shigeyuki Hamori *
Graduate School of Economics, Kobe University, 2-1, Rokkodai, Nada-Ku, Kobe 657-8501, Japan;
[email protected]
* Correspondence: [email protected]
Abstract: In this study, we investigate the relationship between environmental, social, and gover-
nance (ESG) disclosures and stock price crash risk. A stock price crash is a dreadful event for market
participants. Thus, exploring stock price crash determinants is helpful for investment decisions and
risk management. In this study, we use samples of major market index components in Europe, the
United States, and Japan to perform regression analyses, after controlling for other potential stock
price crash determinants. We estimate static two-way fixed-effect models and dynamic GMM models.
We find that coefficients of firm-level ESG disclosures are not statistically significant in the static
model. ESG disclosure coefficients in the dynamic model are not statistically significant in the U.S.
market sample. On the other hand, coefficients of ESG disclosure scores in the dynamic model are
statistically significant and negative in the European and Japanese marker sample. Our findings
suggest that ESG disclosures lower future stock price crash risk; however, the effect and predictive
power of ESG disclosures differ among regions.
Keywords: ESG; stock price crash risk; crash risk measure

1. Introduction
Citation: Murata, Rio, and Shigeyuki Sustainable investment, including socially responsible investments (SRIs), corporate
Hamori. 2021. ESG Disclosures and social responsibility (CSR) investments, and environmental, social, and governance (ESG)
Stock Price Crash Risk. Journal of Risk investments, have engaged interest in financial markets. ESG investment is an investment
and Financial Management 14: 70. approach that considers environmental, social, and governance factors in its analysis,
https://doi.org/10.3390/jrfm14020070 selection, and management. ESG investing has attracted a great deal of attention, especially
since the UN Principles of Responsible Investment (UNPRI) launch in April 2006 at the New
Academic Editor: Thanasis Stengos York Stock Exchange. The process to develop the PRI started in early 2005, under the United
Received: 11 January 2021 Nations Secretary-General Kofi Annan (PRI n.d.). It is composed of six principles, which
Accepted: 4 February 2021
are compiled in Table 1. ESG investing has developed based on the idea that companies
Published: 7 February 2021
need to consider their corporate business from the perspective of the three ESG factors in
order to ensure their sustainability.
Publisher’s Note: MDPI stays neutral
The investment strategies of ESG investing are generally categorized into six or seven
with regard to jurisdictional claims in
types (Boffo and Patalano 2020; Global Sustainable Investment Alliance 2018). Here, we
published maps and institutional affil-
explain the strategies in seven categories. The first strategy is “Negative/Exclusionary
iations.
Screening”, which involves the removal of specific sectors, companies, or practices from
a fund or portfolio, according to specific ESG criteria. “Positive/Best-In-Class Screening”
is an approach which invests in sectors, companies, or projects selected for positive ESG
performance by comparison among industrial sectors. “Norms-Based Screening” involves
Copyright: © 2021 by the authors.
the screening of investments above criteria of business practices based on international
Licensee MDPI, Basel, Switzerland.
norms such as those published by the OECD and UN. Norms-based screening includes
This article is an open access article
positive/best-in-class screening in some of the literature. “ESG Integration” involves the
distributed under the terms and
systematic and explicit inclusion of ESG factors in the investment process. “Sustainabil-
conditions of the Creative Commons
ity Themed Investing” involves investing in environmental, social, or governance areas
Attribution (CC BY) license (https://
related to sustainability, such as clean energy and green technology. “Impact Investing”
creativecommons.org/licenses/by/
4.0/).
aims at social or environmental problems, often for social impact. The last is “Corporate
J. Risk Financial Manag. 2021, 14, 70. https://doi.org/10.3390/jrfm14020070 https://www.mdpi.com/journal/jrfm

J. Risk Financial Manag. 2021, 14, 70 2 of 20
Engagement and Shareholder Action,” using shareholder power to influence corporate

behaviors based on comprehensive ESG guidelines.
Table 1. The six principles of responsible investment.
We will incorporate ESG issues into investment analysis and decision-making

Principle 1
processes.
We will be active owners and incorporate ESG issues into our ownership policies
Principle 2
and practices.
We will seek appropriate disclosure on ESG issues by the entities in which we
Principle 3
invest.
We will promote acceptance and implementation of the Principles within the
Principle 4
investment industry.
We will work together to enhance our effectiveness in implementing the
Principle 5
Principles.
We will each report on our activities and progress towards implementing the
Principle 6
Principles.
Note: source: PRI homepage.
Some people can be confused about the differences between some concepts, such as
SRI, CSR, and ESG, related to sustainable investing. Socially responsible investment (SRI)
has its roots in the practices of religious believers and ethical exclusion (Chidi 2018; Fulton
et al. 2013; Oonishi and Umeda 2018). For example, churches in the United States opposed
gambling, alcohol, and tobacco in the 1920s. During the 1960s and 1970s, SRI developed
in the United States. Some investors avoided investing in certain industries, such as the
military industry, under the civil rights movement and movements against the Vietnam
war. During these early periods, SRI was an exclusionary investment approach, considering
ethical, social, and environmental factors. SRI has been developing to its current form,
which adopts a mixture of positive and negative screening approaches to maximize financial
returns, since the 1990s. An investment approach considering environmental, social, and
governance factors (named ESG) has been studied since around 2006. Although some refer
to ESG investing as one of the approaches of SRI investment, they are different. While SRI
investing is more associated with screening approaches and focuses on ethical, social, or
environmental practices, ESG investing has more investment approaches and uses ESG
criteria to enhance returns and manage risks better.
There are varieties of definitions of ESG argued in the literature (Boffo and Patalano
2020; Global Sustainable Investment Alliance 2018; Ministry of the Environment Gov-
ernment of Japan 2020). ESG is a concept in the financial intermediation chain. Issuers
provide information regarding environmental, social, and governance factors and receive
ESG ratings. Investors, rating providers, and other financial market participants request
information regarding ESG and consider them to decide on their investment behaviors. On
the other hand, corporate social responsibility (CSR) is a concept relating to the relationship
between companies and stakeholders. There are varieties of definitions of CSR published
by academics and institutions (Ministry of the Environment Government of Japan 2020;
Oonishi and Umeda 2018; Yoshida 2019). Firms which have a significant presence (i.e., in
society and economy) can influence many stakeholders, from consumers to the regional
ecosystem. Therefore, firms should consider not only the corporate economic profits, but
also the society and environment, in order to coexist with stakeholders, in order to enhance
their firm values with more balanced growth among the economy, society, and environ-
ment. Firm CSR activities depend on various individual situations and beliefs, as firms
are different in all aspects, such as their location, industry, culture, and religion. Although
both ESG and CSR are concepts that aim at developing sustainable societies, what firms
are closely related to in each concept is different; that is, financial intermediation chains
and stakeholders, respectively.
The Sustainable Development Goals (SDGs) are also closely related to ESG investing.
The 2030 Agenda for Sustainable Development—a plan to act for people, the planet, and
prosperity—was formally adopted at the UN Summit held in September 2015 (United

Nations 2015). From developed countries to developing countries, all countries and
stakeholders will implement this plan from 2016 to 2030. It is composed of 17 sustainable
development goals and 169 targets for a balanced society in three aspects: economy,
society, and environment. This involves the pledge that “no one will be left behind”. The
establishment of the SDGs is one factor which has made ESG investing draw more interest
in financial markets.
As ESG approach has attracted attention and grown in financial markets; the num-
ber of published multidisciplinary literature on ESG and its impact on firm actions and
outcomes has also increased. Some studies have focused on the relationships between
corporate social performance and corporate financial performance, while others have fo-
cused on the relationships between ESG and the cost of capital. This study focuses on
the relationship between ESG and firm risk; in particular, stock price crash risk. Extreme
drops in price in the stock market are known as crashes. Investigating crash risk provides
information on asymmetry in risks, especially downside risks. Therefore, the study of stock
price crash risk can help investors to better make decisions and manage risks.
Crashes are dreadful events for market participants. This kind of negative movement
can occur at an aggregate market level or at the single stock level. When an investor with
a large position in a stock suffers a significant crash, it can have a considerable influence
on their reputational capital. Unfortunately, the movements in stock markets tend to be
decreases rather than increases. The distribution of stock returns is asymmetric. Stock
prices are prone to crashes.
According to the model developed by Jin and Myers (2006), the existence of abrupt
stock price drops in firms can be explained by the information asymmetry between inside
managers and outside investors. Firm managers, for their own sake, tend to hide bad
news from outside investors and, when it reaches a limit to keep hiding the news, the
accumulated news comes out, thus bringing on crashes (Hutton et al. 2009; Jin and Myers
2006). Although they should avoid crashes, it is difficult for investors to guess which firms
and managers are withholding bad news, as it is inside information. Some researchers have
carried out research to discover common determinants or factors of stock price crashes.
Several research studies have studied the relationships among firm activities for
sustainability or social responsibility, bad news hoarding behaviors of firm managers, and
corporate finance report transparency. Firms with more socially responsible behaviors
tend to provide more transparent financial reporting information (Gelb and Strawser 2001;
Kim et al. 2012). Kim et al. (2014) found that firms with better CSR performances were
associated with lower stock price crash risk. On the other hand, there exists a concern that
firms that seem socially responsible may not be ethical (Hemingway and Maclagan 2004;
Prior et al. 2008). They may use CSR as a tool to divert the attention of stakeholders from
corporate bad behavior or information. In this case, better CSR performance may not be
associated with better financial performance.
This study focuses on ESG disclosures, as it seems useful as an indicator of corporate
ethical behavior. Several rating providers provide ESG scores evaluated using unique
methodologies. The ESG disclosure ratings are based only on the level of corporate
disclosures related to environmental, social, and governance factors. It appears that firms
that are active with respect to ESG issues are socially responsible. Further, the disclosure
level can reflect the corporate tendency of information supply. More active firms regarding
ESG issues are more socially responsible; these firms are generally also ethical in terms
of financial reporting. Therefore, we should expect that firms with higher ESG disclosure
scores are associated with lower stock price crash risk.
In this study, we investigate the relationships between ESG disclosures and stock price
crash risk in three regions: Europe, the United States, and Japan. Although these three
regions are common in holding more considerable sustainable investment assets, they also
show significant differences. According to the Global Sustainable Investment Review 2018
released by the Global Sustainable Investment Alliance (2018), these three countries had the
largest sustainable investment assets, considering ESG factors, in the five major markets
in 2018. Europe had the largest assets, about USD 14,075 billion, the United States had
about USD 11,995 billion of assets, while Japan had about USD 2180 billion of assets. While
the proportion of sustainable investment (relative to total managed assets) for Europe was
48.8%, that in the other two regions was much lower: 25.7% in the United States and 18.3%
in Japan in 2018. We consider that comparisons among regions can provide new insights
regarding stock price crash determinants.
We performed regression analyses on the effects of ESG disclosures with samples
of the listed firms on major market indexes in Europe, the United States, and Japan. We
employed both static two-way fixed-effect models and dynamic GMM. We controlled
for potential stock price crash determinants, found in previous studies in the literature.
Coefficients of ESG disclosure scores were not statistically significant in the static model.
ESG disclosures coefficients in the U.S. market sample were not statistically significant in
the dynamic model. On the other hand, coefficients of ESG disclosures in the European and
Japanese market sample were statistically significant and negative in the dynamic model.
We found a negative relation between firm-level ESG disclosures and future stock price
crash risk in Europe and Japan. Our findings suggest that ESG disclosures are negatively
associated with future stock price crash risk; however, the effect and predictive power of
ESG disclosures differ among regions.
2. Literature Review
2.1. Stock Price Crash Factors and Bad News Hoarding Theory
We investigated the literature regarding firm-level factors of stock price crash risk.
Chen et al. (2001) developed two measures of crash likelihood: negative coefficient of
skewness (NCSKEW) and down-to-up volatility (DUVOL). The authors adopted all NYSE
and AMEX firms as a sample and found positive relationships between trading volume,
past returns, and firm size with stock price crash risk.
Stock price crashes are closely related to corporate bad news hoarding behaviors.
Jin and Myers (2006) developed bad news hoarding theory to explain the existence of
firm-level abrupt negative movements in stock prices. According to this theory, several
corporate managers may withhold bad news from outside investors. Managers cannot keep
hiding bad news from market participants and, when it reaches a limit, the accumulated
news is disclosed, thus bringing on a crash in prices. Stocks lacking transparency are more
prone to crashes. Some researchers have focused on corporate behavior and bad news
hoarding theory to performed analyses on stock price crash factors.
Hutton et al. (2009) investigated the effect of transparency of financial reporting
and found that firms with more opaque financial reporting were more prone to stock
price crashes. The level of transparency in financial reporting was measured through
discretionary accruals. Kim et al. (2011) used U.S. firms as a sample and found a positive
relation between tax avoidance and firm-level stock price crash risk. Kim et al. (2014)
focused on CSR performance in the U.S. market. The authors concluded that higher CSR
firms were likely to exhibit a high standard of transparency and were associated with lower
crash risks.
Kim and Zhang (2016) used a sample of U.S. firms and found that conditional account-
ing conservatism restricted the incentives and unethical behaviors of managers, such as
concealing bad news. Thus, accounting conservatism is associated with lower stock price
crash risks. There have been other findings related to information hoarding; such as the
negative relationship between crash risk and financial statement comparability (Kim et al.
2016) and the positive relationship between ambiguity in financial reporting and crash risk
(Ertugrul et al. 2017). Li et al. (2020) focused on the disclosure timing of firms in financial
reporting. The authors used a sample of listed Chinese firms and found that switching
the disclosure timing of annual reports to distract market attention increased stock price
crash risk.
2.2. ESG Disclosure

Several rating providers have evaluated the ESG issues of firms, based on their
disclosures or other industry data sources, and published their ratings. Examples of
large ESG ratings providers are Bloomberg, MSCI, Sustainalytics, Thomson Reuters, and
RobecoSAM. Their rating methodologies are various. Some providers, such as MSCI,
determine ESG assessment based on the qualities of the efforts by ESG issuers, while other
providers, such as Bloomberg, evaluate their disclosures using quantitative models. Rating
providers determine assessments by focusing on a firm’s ESG performance, disclosure, or
both in their weightings and provide their own ESG scores. Although ESG disclosures
and performance can be confused, they are different. The score used in the analysis varies
throughout the literature.
For this study, we adopted the Bloomberg ESG disclosure score. Bloomberg disclosure
ratings are provided by the Bloomberg database. They focus on the level of firm disclosure
of environmental, social, and governance information. Although disclosure scores do not
include an evaluation of the qualities of ESG efforts, they are determined in a mechanical
process and represent the tendency toward information disclosure. Bloomberg disclosure
scores cover a larger number of firms than other rating providers. Furthermore, the
Bloomberg database has been widely used in the financial industry and academia. Many
studies have used the Bloomberg disclosure scores in their analyses.
Fatemi et al. (2018) investigated the effect of ESG performance and disclosure on firm
values for U.S. firms. They discovered the possibility that ESG disclosures dilute the effects
of performance in both positive and negative directions. Yuyama et al. (2019) investigated
the relationship between ESG disclosures and investment returns in the Japanese stock
market and found no significant differences. Eliwa et al. (2019) investigated the relation
between ESG performances and disclosures and debt capital costs in 15 EU countries. ESG
performance and disclosure did not exhibit significant differences in their study. Boffo
and Patalano (2020) argued that the correlation among ESG scores of a firm provided by
different rating providers is low. Different rating providers have different rating approaches
and, thus, even the ESG performance scores show differences. The relationship between
ESG disclosures and performances, therefore, is not yet clear.
3. Analysis
3.1. Data
All of the data used in this study were retrieved from the Bloomberg database. The
data consisted of the major market index compositions in three regions—Europe, the United
States, and Japan. The sample for the European region was based on the STOXX Euro 600
index. To explain the major European economy, we adopted listed firms of the STOXX Euro
600 as the sample components for Europe (as of October 2020). For comparison, the United
States and Japanese samples were also based on their major market indexes; we adopted
the S&P 500 index components for the U.S. sample and the Nikkei-225 index components
for the Japanese sample (as of October 2020).
The STOXX Europe 600 index is a market index which represents the major European
markets. It is composed of 600 companies across 17 countries in the European region
(Qontigo n.d.). The constituent countries are as follows: Austria, Belgium, Denmark,
Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland,
Portugal, Spain, Sweden, Switzerland, and the United Kingdom. The S&P 500 index is
a representative market index in the U.S. market. It consists of 500 leading firms in the
U.S. market (Bloomberg Professional Services n.d.). The Nikkei-225 Stock Average is a
major market index in the Japanese market. It is a price-weighted index. It is composed of
225 top-rated Japanese companies listed in the first section of the Tokyo Stock Exchange
(Bloomberg Professional Services n.d.).
3.2. Environmental, Social, and Governance Ratings

The initial sample consisted of environmental, social, and governance rating data
provided by the Bloomberg database. In this study, we used the Bloomberg ESG disclo-
sure score as the initial sample. The Bloomberg database provides a larger number of
ESG ratings of firms than other rating providers. Bloomberg ESG data cover more than
11,700 companies in 102 countries (as of July 2020) (Bloomberg Professional Services 2020).
Additionally, the Bloomberg ESG disclosure score data are annual data covering over
ten years.
The Bloomberg ESG disclosure score data focus on the level of a firm’s environmental,
social, and governance disclosure, not including assessments of its ESG performance. The
score ranges from 0.1 (for companies with the minimum level of the ESG data disclosure)
to 100 (for companies with the full extent of the disclosure on every data point collected by
Bloomberg). Each data point is weighted by its importance. The score is also adjusted to
each industry sector. Thus, each firm is only evaluated for the data which is relevant to its
industrial sector.
The Bloomberg database provides ratings for the level of firm disclosure and not only
the overall ESG factors, but also the three individual factors of ESG. Thus, we performed
analyses using environmental disclosure scores, social disclosure scores, and governance
disclosure scores.
3.3. Crash Risk Measures

We adopted two measures, based on firm-specific weekly returns (estimated as the
residuals from the market model), of firm-specific crash risk, following Chen et al. (2001).
They estimated the following expanded market model regression:
r j,τ = α j + β 1.j rm,τ −2 + β 2.j rm,τ −1 + β 3.j rm,τ + β 4.j rm,τ +1 + β 5.j rm,τ +2 + ε j,τ , (1)
where r j,τ is the return on stock j in week τ and rm,τ is the return on the market index in
week τ. Returns on stocks and indexes are basically calculated from the closing prices on
Fridays. When there is no closing price on Friday, a closing price which is before and most
close to Friday in the week is extracted, instead. In the European market analyses, we set
the STOXX Euro 600 as the market index. We also set the S&P 500 index and the Nikkei-225
index for the U.S. and Japanese markets, respectively. Wj,s denotes the firm-specific weekly
return for firm j in week s, calculated as the natural logarithm of one plus the residual
return, r j,τ , from Equation (1).
Equation (1) includes lead and lag terms of the market index. These terms are for
solving what we call nonsynchronous trading. Trading in the stock market does not occur
synchronously (Lo and MacKinlay 1990). Trading frequencies are different in each stock.
The trading intensities for a stock depend on the situation and differ from hour to hour.
However, the analyses in this study are based on weekly data. As mentioned above, the
stock prices considered are the closing price, which is the last transaction price of a stock
in a week. Its actual time is different. This study adopts lead and lag terms of the market
indexes, in order to allow for nonsynchronous trading (Dimson 1979).
The first measure of crash risk was the negative coefficient of skewness of firm-specific
weekly returns over the year (NCSKEW), which is calculated by taking the negative of
the third moment of firm-specific weekly returns for each year as the first step. Then, it is
normalized by the standard deviation of firm-specific weekly returns raised to the third
power. Thus, the NCSKEW for firm j in year t is calculated using the following equation:
h i
− n(n − 1)3/2 ∑ Wj,τ 3
NCSKEWj,t = 3/2 , (2)
( n − 1 )( n − 2 W 2
) ∑ j,τ
where n denotes the number of weekly returns during year t.

The second measure of crash risk was the down-to-up volatility measure (DUVOL)
of the crash likelihood. Firm-specific weekly returns for firm j over a fiscal year period
t are divided into two groups: “down” weeks and “up” weeks. Down weeks refer to
weeks when the returns are below the annual mean, while up weeks refer to when the
returns are above the annual mean. The standard deviation of firm-specific weekly returns
is calculated separately for each of the two groups. DUVOL is the natural logarithm of the
ratio of the standard deviation in the down weeks to that in the up weeks:
2
(nu − 1) ∑ Down Wj,τ
( )
DUVOL j,t = log 2
, (3)
(nd − 1) ∑U p Wj,τ
where nu denotes the number of up weeks in year t and nd denotes the number of down
weeks in year t. The higher the value of DUVOL, the more significant the crash risk.
When there is even one missing value for firm-specific weekly returns of a firm in a
given year, we dropped the crash risk of that year from the dataset. We employed one-
year-ahead NCSKEW or DUVOL as an explained variable in the empirical analyses below.
Taking lagged explanatory variables can avoid simultaneity or reverse causality.
3.4. Explanatory Variables

The primary explanatory variable was ESG_SCORE, which is the firm-level Bloomberg
ESG disclosure scores obtained from Bloomberg database. We used a one-year lag between
the explained variable and all of the explanatory variables.
We employed several control variables, which researchers have previously found to
have an influence on future crash risk. Following Chen et al. (2001), we used detrended
turnover (DTURNOVER), past returns (RETs), and stock volatility (SIGMAR). Turnover is
calculated as the monthly trading volume divided by the total number of shares outstand-
ing during the month. DTURNOVER is calculated as the average turnover over the current
year minus the average turnover over the previous year. DTURNOVER was considered as
it captures the intensity of disagreements among investors.
RET is calculated as the mean of firm-specific weekly returns during a given period
multiplied by 100. The authors explained its predictive power through the existence of
bubbles; that is, prices fall back to fundamentals. SIGMAR is calculated as the standard
deviation of firm-specific weekly returns. The relation of SIGMAR to crash risk differs
throughout the literature.
Following Chen et al. (2001) and Hutton et al. (2009), we controlled for firm size
(SIZE), price-to-book ratio (PBR), financial leverage (LEV), and returns on assets (ROAs).
SIZE is defined as the natural log value of the market value of equity. Although whether the
market-to-book or book-to-market ratio is employed as a control variable differs throughout
the literature, we employed the price-to-book ratio (PBR) in this study. PBR is defined as
the price per share divided by book value per share. In general, a higher PBR indicates
overvaluing. Thus, we expected that higher PBR could lead to a crash in prices. LEV is
calculated as total long-term debts divided by total assets. ROA is calculated as profit
before tax divided by total assets. Glamour stocks are considered more crash-prone.
Following Hutton et al. (2009) and Kim et al. (2014), we employed discretionary
accruals absolute value (ABACC). The authors considered ABACC as a proxy for levels of
opacity in corporate financial reporting. In this study, we used the absolute discretionary
value of cash flow from operating activities minus net income estimated from the Jones
model (Dechow et al. 1995) as ABACC. All explanatory variables were obtained from the
Bloomberg database or calculated based on data from the Bloomberg database.
4. Results
4.1. Descriptive Statistics
Table 2 shows descriptive statistics for the Euro STOXX 600 components. The mean
values of crash risk measures were 0.1411 for NCSKEW and 0.0856 for DUVOL. The mean
value of firm-level Bloomberg ESG disclosure scores was 39.7131. The main assumption
behind the GMM is that each variable should be stationary (Ahn and Schmidt 1995;
Arellano and Bond 1991). The results of a pnael unit root test (Augmented Dickey–Fuller
(ADF) test) indicate that each variable has no unit root and thus is stationary in the Euro
STOXX 600 sample.
Table 2. Descriptive statistics for Euro STOXX 600 members.
Variable N Mean Median Stdev ADF Test

NCSKEW 5906 0.1411 0.0913 0.9890 3723.66 ***
DUVOL 5906 0.0856 0.0773 0.7462 3667.02 ***
ESG_SCORE 5906 39.7131 40.9091 14.9543 1781.72 ***
DTURNOVER 5906 −0.0035 −0.0020 0.0300 3430.90 ***
RET 5906 −0.0757 −0.0571 0.4731 3852.83 ***
PBR 5906 4.1509 2.1941 25.6243 1774.66 ***
SIZE 5906 9.2343 9.1753 1.4548 1899.03 ***
SIGMAR 5906 0.0330 0.0291 0.0155 2259.25 ***
LEV 5906 18.4030 16.7124 13.9883 2131.79 ***
ROA 5906 0.0884 0.0655 0.2017 2442.10 ***
ABACC 5906 0.0575 0.0298 0.9833 3069.21 ***
Note: NCSKEW is the negative coefficient of skewness of firm-specific weekly returns over the year. DUVOL is
the natural logarithm of the ratio of the standard deviation of firm-specific weekly returns in the down weeks to
the up weeks. ESG_SCORE is Bloomberg ESG disclosure score from the Bloomberg database. DTURNOVER is
the detrended turnover. DTURNOVER is the average turnover over the current year minus the average turnover
over the previous year, where turnover is the monthly trading volume divided by the total number of shares
outstanding during the month. RET is the mean of firm-specific weekly returns during a given period times 100.
PBR is the price per share divided by book value per share. SIZE is the natural logarithm of the market value
of equity. SIGMAR is the standard deviation of firm-specific weekly returns. LEV is the total long-term debts
divided by total assets. ROA is the profit before tax divided by total assets. ABACC is the absolute discretionary
value of cash flow from operating activities minus net income, as estimated by the Jones model. Panel Augmented
Dickey–Fuller (ADF) test was performed with a trend and an intercept. *** reports statistical significance at the
1% level.
Table 3 provides descriptive statistics for the S&P 500 components. The mean value of
NCSKEW was 0.1238, while that of DUVOL was 0.0884. The mean value of ESG disclosure
scores was 30.5249, lower than the average ESG disclosure score of the Euro STOXX 600.
The standard deviation of the absolute value of discretionary accruals (ABACC) was
quite large. A possible cause for this was the difference in calculation. In this study, we
substituted the absolute discretionary value of cash flow from operating activities minus
net income to ABACC. Panel ADF test results suggest that each variable has no unit root
and is stationary in the S&P 500 sample.
Table 4 reports descriptive statistics for the Nikkei-225 components. The mean values
of NCSKEW and DUVOL were 0.0597 and 0.0376, respectively. The average value of ESG
disclosure scores was 36.9411. The average ESG disclosure score for the Nikkei-225 was
higher than that of the S&P 500 and lower than that of the Euro STOXX 600. As well as the
Euro STOXX 600 and S&P 500, each variable in the Nikkei-225 sample has no panel unit
root and is stationary.
Table 3. Descriptive statistics for S&P 500 members.

NCSKEW 5246 0.1238 0.1024 1.0274 3264.73 ***
DUVOL 5246 0.0884 0.0796 0.7657 3349.95 ***
ESG_SCORE 5246 30.5249 27.6860 15.0895 1257.66 ***
DTURNOVER 5246 −0.0046 −0.0030 0.0252 3604.62 ***
RET 5246 −0.0827 −0.0570 0.4361 3884.29 ***
PBR 5246 6.3840 2.9571 36.0353 1292.50 ***
SIZE 5246 9.7038 9.5837 1.1518 1328.28 ***
SIGMAR 5246 0.0316 0.0274 0.0164 1894.72 ***
LEV 5246 21.2960 19.9755 15.0503 1657.01 ***
ROA 5246 0.0884 0.0767 0.0964 2110.71 ***
ABACC 5246 64.9508 0.0303 2881.001 3029.41 ***
PBR is the price per share divided by book value per share. SIZE is the natural logarithm of the market value of
equity. SIGMAR is the standard deviation of firm-specific weekly returns. LEV is the total long-term debts divided
by total assets. ROA is the profit before tax divided by total assets. ABACC is the absolute discretionary value
of cash flow from operating activities minus net income, as estimated from the Jones model. Panel Augmented
1% level.
Table 4. Descriptive statistics for Nikkei-225 members.

NCSKEW 2803 0.0597 0.0334 0.8880 1664.98 ***
DUVOL 2803 0.0376 0.0389 0.6958 1739.87 ***
ESG_SCORE 2803 36.9411 38.8430 11.4549 729.80 ***
DTURNOVER 2803 −0.0021 −0.0026 0.0864 1809.29 ***
RET 2803 −0.1011 −0.0850 0.4662 1903.46 ***
PBR 2803 1.6287 1.2433 1.5714 850.47 ***
SIZE 2803 13.4128 13.3618 1.1328 669.30 ***
SIGMAR 2803 0.0344 0.0317 0.0130 1122.43 ***
LEV 2803 18.4260 16.7496 13.9815 786.01 ***
ROA 2803 0.0505 0.0433 0.0572 908.06 ***
ABACC 2803 0.0291 0.0218 0.0277 1395.78 ***
PBR is the price per share divided by book value per share. SIZE is the natural logarithm of the market value of
equity. SIGMAR is the standard deviation of firm-specific weekly returns. LEV is the total long-term debts divided
by total assets. ROA is the profit before tax divided by total assets. ABACC is the absolute discretionary value
of cash flow from operating activities minus net income, as estimated from the Jones model. Panel Augmented
1% level.
4.2. The Effect of ESG Disclosure on Crash Risk

Table 5 compares the results of the regression analyses using a two-way fixed-effect
model of the relationship between ESG disclosures and one-year-ahead firm-specific stock
price crash risk. In this regression, we controlled for cross-section fixed effects and year
fixed effects, as well as other potential determinants for crash risk. All reported standard
errors and p-values were computed using the white period method.
Table 5. Regression analysis on the effect of environmental, social, and governance disclosures on crash risk using static
panel models.
Euro STOXX 600 S&P 500 Nikkei-225

NCSKEWt DUVOLt NCSKEWt DUVOLt NCSKEWt DUVOLt
−0.0007 −0.0014 0.0014 0.0019 −0.0001 −0.0008
ESG_SCOREt−1
(0.0023) (0.0018) 0.0029 (0.0021) (0.0047) (0.0034)
−0.6138 −0.4878 −0.1584 −0.1579 0.0389 −0.0116
DTURNOVERt−1
(0.4504) (0.3707) (0.9454) (0.6292) (0.3111) (0.2722)
0.0474 * 0.0466 ** 0.1433 *** 0.1458 *** 0.2316 *** 0.2281 ***
RETt−1
(0.0278) (0.0224) (0.0388) (0.0284) (0.0450) (0.0333)
7.2 × 10−5 0.0003 0.0007 *** 0.0007 *** 0.0376 0.0230
PBRt−1
(0.0003) (0.0002) (0.0002) (0.0002) (0.0286) (0.0190)
0.5026 *** 0.4628 *** 0.6662 *** 0.5271 *** 0.4492 *** 0.4250 ***
SIZEt−1
(0.0452) (0.0349) (0.0509) (0.0385) (0.0817) (0.0602)
−5.6883 *** −4.3256 *** −1.4930 −0.8457 −4.4931 −4.3903 **
SIGMARt−1
(1.4530) (1.0423) (1.5176) (1.0118) (2.1677) (1.9019)
−0.0017 −0.0016 −0.0055 ** −0.0041 ** 0.0017 0.0011
LEVt−1
(0.0025) (0.0020) (0.0023) (0.0017) (0.0047) (0.0035)
−0.0527 −0.0635 −0.2577 −0.0504 0.0211 −0.2054
ROAt−1
(0.0509) (0.0436) (0.3307) (0.2560) (0.7804) (0.5924)
0.0048 ** 0.0053 *** −2.5 × 10−6 *** −4.3 × 10−7 −1.0253 −0.7279
ABACCt−1
(0.0022) (0.0016) (5.6 × 10−7 ) (7.4 × 10−7 ) (0.7787) (0.5923)
Sample (adjusted) 2006–2019 2006–2019 2006–2019 2006–2019 2006–2019 2006–2019
Observations 5495 5495 4985 4985 2590 2590
Adjusted R2 0.0611 0.0391 0.0721 0.0897 0.0413 0.0575
Cross-section fixed
included included included included included included
effects
Year fixed effects included included included included included included
Note: NCSKEW is the negative coefficient of skewness of firm-specific weekly returns over the year. DUVOL is the natural logarithm of
the ratio of the standard deviation of firm-specific weekly returns in the down weeks to the up weeks. ESG_SCORE is Bloomberg ESG
disclosure score from the Bloomberg database. DTURNOVER is the detrended turnover. DTURNOVER is the average turnover over the
current year minus the average turnover over the previous year, where turnover is the monthly trading volume divided by the total number
of shares outstanding during the month. RET is the mean of firm-specific weekly returns during a given period times 100. PBR is the price
per share divided by book value per share. SIZE is the natural logarithm of the market value of equity. SIGMAR is the standard deviation
of firm-specific weekly returns. LEV is the total long-term debts divided by total assets. ROA is the profit before tax divided by total assets.
ABACC is the absolute discretionary value of cash flow from operating activities minus net income, as estimated from the Jones model.
Intercepts and dummies for each year are not shown. Standard errors, which are in parentheses, are robust to serial correlation. *, **, and ***
report statistical significance at the 10%, 5%, and 1% levels, respectively. Variables definitions are compiled in the Appendices A and B.
Coefficients of environmental, social, and governance (ESG) disclosures were not

statistically significant in the static model. ESG disclosures were not associated with one-
year-ahead stock price crash risk. The effects of ESG disclosures on crash risk were not
observed in the two-way fixed-effects static model after controlling for other potential stock
price crash determinants.
As expected, past returns (RETs), firm size (SIZE), and price-to-book ratio (PBR) were
positively associated with future crash risk. Chen et al. (2001) found a positive relationship
between RET and future crash risk. High past returns sustained in bubbles can decrease
and fall back to fundamentals in prices. Chen et al. (2001) explained the reason for positive
coefficients of SIZE as a difference in scope for discretionary disclosure between small and
large firms. Although managers prefer to conceal bad news from market participants, the
managers of smaller firms have more scope for disclosure timing. As expected, PBR was
positively related to crash risk. The coefficients of stock volatility (SIGMAR) differed among
analyses. In our opinion, the relationship between stock volatility and crash likelihood
depends on the distribution.
Coefficients of financial leverage (LEV) were negative. A higher LEV indicates un-
stable management. Thus, we expected that higher LEV could lead to a crash in prices.
The negative coefficients of LEV differed from our prediction. Statistically significant
coefficients of the absolute discretionary value of cash flow from operating activities minus
net income (ABACC) show both negative and positive signs. ABACC is considered as
a proxy for levels of opacity in corporate financial reporting. We expected that a higher
ABACC could lead to a future stock price crash. We must note that we employed the
absolute discretionary value of cash flow from operating activities minus net income, not
the absolute value of discretionary accruals.
We employed additional explanatory variables of lagged crash risk (NCSKEW or DU-
VOL) in the regression model, enabling us to analyze the relation between ESG disclosure
and crash risk using dynamic models. Table 6 compares the results of regression analyses
on the effect of environmental, social, and governance disclosure on crash risk in dynamic
panel models. We performed these analyses using the dynamic GMM method, which can
exclude other endogeneity biases. Things we require when using GMM are wide and short
datasets and the stationarity of the series (Ahn and Schmidt 1995; Arellano and Bond 1991).
All reported standard errors and p-values were computed using the white period method.
Table 6. Regression analysis on the effect of environmental, social, and governance disclosures on crash risk using dynamic
panel models.

−0.0235 * −0.0181 ** −0.0222 −0.0129 −0.0751 *** −0.0405 ***
ESG_SCOREt−1
(0.0124) (0.0082) (0.0158) (0.0120) (0.0175) (0.0137)
0.0858 ** 0.0851 ** 0.0490
NCSKEWt−1
(0.0419) (0.0401) (0.0368)
0.0396 0.0416 0.1670 ***
DUVOLt−1
(0.0556) (0.0497) (0.0455)
0.8510 −0.3289 −0.3565 3.9985 ** 0.5810 0.5915 *
DTURNOVERt−1
(2.1352) (1.5166) (2.3539) (1.8951) (0.4326) (0.3553)
0.1941 0.0556 0.2821 ** 0.2298 ** 0.3165 *** 0.4928 ***
RETt−1
(0.1195) (0.1056) (0.1296) (0.1104) (0.1104) (0.1008)
0.0049 0.0050 0.0012 −0.0008 0.1420 * 0.0421 **
PBRt−1
(0.0052) (0.0053) (0.0027) (0.0022) (0.0741) (0.0606)
0.8279 *** 0.5612 *** 0.6076 *** 0.6867 *** 0.3802 * 0.3408 **
SIZEt−1
(0.1493) (0.1138) (0.2276) (0.1772) (0.2083) (0.1448)
−3.3567 −6.6139 −13.2116 ** −8.9440 ** −15.3896 *** −8.1976 **
SIGMARt−1
(5.7344) (4.0317) (5.5819) (4.5421) (5.4252) (3.9800)
0.0224 * 0.0020 −0.0010 −0.0105 0.0253 * 0.0427 ***
LEVt−1
(0.0120) (0.0090) (0.0011) (0.0085) (0.0146) (0.0108)
−1.0736 −0.0482 0.1895 −0.7039 2.6724 ** 1.4209
ROAt−1
(0.8419) (0.4573) (1.3612) (0.9993) (1.3496) (1.1750)
−0.0301 −0.0263 −0.0001 −2.8 × 10−6 −0.9471 −2.6365
ABACCt−1
(0.0465) (0.0411) (0.0001) (0.0001) (2.0197) (1.9208)
Sample (adjusted) 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019
Observations 4995 4995 4518 4518 2366 2366
Cross-section fixed
effects
disclosure score from the Bloomberg database. DTURNOVER is the detrended turnover. DTURNOVER is the average turnover over
the current year minus the average turnover over the previous year, where turnover is the monthly trading volume divided by the total
number of shares outstanding during the month. RET is the mean of firm-specific weekly returns during a given period times 100. PBR is
the price per share divided by book value per share. SIZE is the natural logarithm of the market value of equity. SIGMAR is the standard
deviation of firm-specific weekly returns. LEV is the total long-term debts divided by total assets. ROA is the profit before tax divided by
total assets. ABACC is the absolute discretionary value of cash flow from operating activities minus net income, as estimated from the Jones
model. Intercepts and dummies for each year are not shown. Standard errors, which are in parentheses, are robust to serial correlation. *, **,
and *** report statistical significance at the 10%, 5%, and 1% levels, respectively.
As well as the results of analyses in the static model, coefficients of environmental,

social, and governance (ESG) disclosures in the U.S. sample were not statistically significant
in the dynamic model. On the other hand, coefficients of ESG disclosures in the European
and Japanese market sample were statistically significant in the dynamic model. ESG
disclosures were negatively associated with future stock price crash risk. The negative
signs of NCSKEW and DUVOL were consistent with our prediction—that active firms
regarding ESG disclosure are less likely to conceal bad news and, thus, are associated
with lower crash risks. Our findings suggest that, when we avoid endogeneity bias, ESG
disclosures can be used as stock price crash determinants in the European and Japanese
markets.
Lagged crash risk (NCSKEW or DUVOL) was positively associated with one-year-
ahead crash risk, as expected. Stocks with higher crash risks were more likely to crash in
the future. Coefficients of past returns (RETs), firm size (SIZE), stock volatility (SIGMAR),
and price-to-book ratio (PBR) in Table 6 show the same signs as in Table 5. The coefficient
of returns on assets (ROAs) was positive. While stocks with higher ROAs are attractive to
investors, glamour stocks are more crash-prone. Detrended turnover (DTURNOVER) is a
proxy for the level of disagreement among investors. Stocks with more different opinions
in prices can lead to higher crash risk. The positive sign was consistent with our prediction.
Coefficients of financial leverage (LEV) were positive in the dynamic model, as expected.
4.3. ESG Disclosure Components

The Bloomberg ESG database provides disclosure ratings for each factor of environ-
mental, social, and governance scores. Thus, we performed analyses of the three ESG
factors. Firm-level Bloomberg environmental disclosure score is written as E_SCORE in
the analysis results. Firm-level Bloomberg social disclosure score is written as S_SCORE,
and Firm-level Bloomberg governance disclosure score is written as G_SCORE. Regression
analyses with the three ESG factors in place of ESG overall disclosure score were performed
using the dynamic model with the GMM approach. We controlled for the same potential
stock price crash determinants as in the other regression analyses. All reported standard
errors and p-values in Section 4.3 were computed using the white period method.
Table 7 compares the results of regression analyses on the effect of environmental
disclosure on crash risk in dynamic panel models. The coefficients of environmental
disclosure were statistically significant for the Euro STOXX 600 and Nikkei-225 samples
when DUVOL, as a proxy for crash risk, was employed. However, it was statistically
insignificant for the S&P 500 sample and for all samples when crash risk was proxied by
NCSKEW.
Table 8 shows the results of the regression analyses on the effect of social disclosure on
crash risk in dynamic panel models. Table 9 compares the results of the regression analyses
on the effect of governance disclosure in dynamic panel models. Both social disclosure and
governance disclosure were insignificant for the S&P 500 sample, regardless of whether
crash risks were proxied by NCSKEW or DUVOL. Meanwhile, social disclosure exhibited
predictive power in the Nikkei-225 and Euro STOXX 600 samples only when NCSKEW
was employed for the regression analysis. Governance disclosure was also statistically
significant in the Euro STOXX 600 and Nikkei-225 samples only when crash risk was
proxied by NCSKEW.
Table 7. Regression analysis on the effect of environmental disclosure on crash risk using dynamic panel models.

−0.0120 −0.0150 ** 0.0115 0.0081 −0.0143 −0.0223 ***
E_SCOREt−1
(0.0100) (0.0072) (0.0110) (0.0090) (0.0104) (0.0082)
0.0806 * 0.0577 0.0674 *
NCSKEWt−1
(0.0442) (0.0445) (0.0361)
0.0463 −0.0125 0.1717 ***
DUVOLt−1
(0.0576) (0.0510) (0.0465)
−0.6610 −0.2384 −1.4227 3.0949 −0.1810 0.1299
DTURNOVERt−1
(2.2136) (1.4185) (2.6334) (2.2847) (0.5139) (0.3891)
0.1743 0.0405 0.2040 0.0812 0.2691 ** 0.4981 ***
RETt−1
(0.1279) (0.1120) (0.1483) (0.1199) (0.1049) (0.0965)
0.0036 0.0020 0.0003 4.3 × 10−5 0.1551 * 0.0467
PBRt−1
(0.0042) (0.0036) (0.0028) (0.0019) (0.0818) (0.0608)
0.8449 *** 0.5260 *** 0.9008 *** 0.7177 *** −0.0481 0.2212
SIZEt−1
(0.1523) (0.1091) (0.2568) (0.1826) (0.1903) (0.1517)
1.1416 −8.1819 ** −10.5115 −9.2521 * −5.8882 −4.6786
SIGMARt−1
(5.9548) (4.0791) (6.7566) (4.8302) (5.1898) (3.8441)
0.0081 −0.0030 0.0049 −0.0024 0.0400*** 0.0407 ***
LEVt−1
(0.0118) (0.0094) (0.0116) (0.0087) (0.0148) (0.0112)
−1.6746 −0.2823 1.1722 1.5010 * 3.9094 *** 1.9044
ROAt−1
(1.1232) (0.4287) (1.1835) (0.8960) (1.3678) (1.1797)
−0.0177 −0.0073 1.4 × 10−5 7.2 × 10−5 −0.5585 −3.1413 *
ABACCt−1
(0.0371) (0.0296) 7.0 × 10−5 ) 9.8 × 10−5 ) (1.9107) (1.8745)
Sample (adjusted) 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019
Observations 4637 4637 3386 3386 2259 2259
Cross-section fixed
effects
Note: NCSKEW is the negative coefficient of skewness of firm-specific weekly returns over the year. DUVOL is the natural logarithm of the
ratio of the standard deviation of firm-specific weekly returns in the down weeks to the up weeks. E_SCORE is Bloomberg environmental
Table 8. Regression analysis on the effect of social disclosure on crash risk using dynamic panel models.

−0.0185 * −0.0095 −0.0142 −0.0006 −0.0476 *** −0.0221 **
S_SCOREt−1
(0.0097) (0.0078) (0.0111) (0.0093) (0.0116) (0.0103)
0.0790 * 0.0654 0.0840 **
NCSKEWt−1
(0.0443) (0.0424) (0.0386)
0.0870 0.0346 0.2025 ***
DUVOLt−1
(0.0552) (0.0498) (0.0480)
−0.9564 −2.2282 0.2341 4.3457 ** 0.8022 * 0.5229
DTURNOVERt−1
(2.1919) (1.5322) (2.3126) (1.7851) (0.4845) (0.3431)
Table 8. Cont.

0.1748 0.1347 0.2378 * 0.2215 * 0.3152 *** 0.5122 ***
RETt−1
(0.1271) (0.1055) (0.1401) (0.1160) (0.1144) (0.0998)
0.0036 0.0040 0.0011 −0.0006 0.2442 *** 0.0783
PBRt−1
(0.0042) (0.0045) (0.0028) (0.0021) (0.0821) (0.0573)
1.0150 *** 0.5689 *** 0.6787 ** 0.6190 *** 0.2291 0.2623 *
SIZEt−1
(0.1786) (0.1237) (0.2653) (0.1867) (0.2085) (0.1390)
2.0931 −6.1765 −12.2037 * −8.7059 * −12.5299 ** −5.2958
SIGMARt−1
(5.9064) (4.0607) (6.2918) (4.6932) (5.4106) (3.9486)
−0.0120 0.0014 0.0030 −0.0082 0.0360 *** 0.0417 ***
LEVt−1
(0.0129) (0.0093) (0.0115) (0.0084) (0.0134) (0.0108)
−1.9263 −0.3404 0.0108 0.1515 2.9410 ** 1.5210
ROAt−1
(1.2163) (0.4881) (1.4471) (0.9922) (1.4581) (1.1832)
−0.0012 0.0038 −6.2 × 10−5 1.5 × 10−5 0.2572 −1.3096
ABACCt−1
(0.0360) (0.0267) (0.0001) (0.0001) (2.0894) (1.8997)
Sample (adjusted) 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019
Observations 4844 4844 4369 4369 2356 2356
Cross-section fixed
effects
ratio of the standard deviation of firm-specific weekly returns in the down weeks to the up weeks. S_SCORE is Bloomberg social disclosure
score from the Bloomberg database. DTURNOVER is the detrended turnover. DTURNOVER is the average turnover over the current
year minus the average turnover over the previous year, where turnover is the monthly trading volume divided by the total number of
shares outstanding during the month. RET is the mean of firm-specific weekly returns during a given period times 100. PBR is the price per
share divided by book value per share. SIZE is the natural logarithm of the market value of equity. SIGMAR is the standard deviation of
firm-specific weekly returns. LEV is the total long-term debts divided by total assets. ROA is the profit before tax divided by total assets.
Intercepts and dummies for each year are not shown. Standard errors, which are in parentheses, are robust to serial correlation. *, **, and ***
report statistical significance at the 10%, 5%, and 1% levels, respectively.
As well as ESG overall disclosure, the three ESG factors were not associated with crash
risk in the S&P 500 sample. While the coefficients of ESG overall disclosure were negative
and statistically significant in the dynamic model, a few coefficients of the three ESG
factors were significant in the sample of the Euro STOXX 600. These results suggest that
the combination of environmental, social, and governance factors produced the observed
predictive power in the European region. On the other hand, the three ESG factors were
significant and associated with crash risk (NCSKEW or DUVOL) in more analyses of the
Nikkei-225 sample. In particular, the coefficients of social disclosure were significant,
regardless of the proxy used for crash risk. However, as well as the European region,
these results suggest that the combination of environmental, social, and governance factors
produced the observed predictive power in Japan.
Table 9. Regression analysis on the effect of governance disclosure on crash risk using dynamic panel models.

−0.0229 * −0.0015 −0.0302 −0.0225 −0.0509 *** −0.0133
G_SCOREt−1
(0.0121) (0.0088) (0.0263) (0.0190) (0.0156) (0.0115)
0.1083 ** 0.0721 * 0.0675 *
NCSKEWt−1
(0.0425) (0.0405) (0.0358)
0.1002 * 0.0587 0.1902 ***
DUVOLt−1
(0.0553) (0.0500) (0.0481)
0.9934 −1.0105 0.1251 4.7074 ** 0.3416 0.4568
DTURNOVERt−1
(2.4402) (1.6707) (2.3201) (1.8475) (0.4319) (0.3552)
0.2767 ** 0.1825 * 0.2516 * 0.2780 ** 0.3512 *** 0.5450 ***
RETt−1
(0.1213) 0.1077) (0.1290) (0.1112) (0.1054) (0.1003)
0.0049 0.0035 0.0019 −0.0004 0.0848 0.0075
PBRt−1
(0.0053) (0.0044) (0.0029) (0.0021) (0.0682) (0.0553)
0.9084 *** 0.5730 *** 0.7218 *** 0.6544 *** 0.3052 0.3012 **
SIZEt−1
(0.1696) (0.1231) (0.2350) (0.1835) (0.1906) (0.1328)
−6.2070 −9.5328 ** −10.3934 ** −9.7495 ** −8.3772 * −5.8335
SIGMARt−1
(5.9598) (3.9820) (5.0131) (4.4102) (4.8208) (3.9218)
0.0267 ** −0.0008 −0.0041 −0.0112 0.0290 ** 0.0414 ***
LEVt−1
(0.0119) (0.0092) (0.0118) (0.0091) (0.0137) (0.0106)
−1.1616 −0.6752 −0.2347 0.5990 3.7894 *** 2.0800 *
ROAt−1
(0.8720) (0.6097) (1.4325) (1.0489) (1.2854) (1.1459)
4.0000 ** 4.3946 *** −9.9 × 10−5 −6.5 × 10−5 1.4924 −1.1884
ABACCt−1
(1.7805) (1.5900) (0.0001) (0.0001) (2.0103) (1.8895)
Sample (adjusted) 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019 2007–2019
Observations 4994 4994 4518 4518 2364 2364
Cross-section fixed
effects
ratio of the standard deviation of firm-specific weekly returns in the down weeks to the up weeks. G_SCORE is Bloomberg governance
5. Conclusions
Stock price crashes are a common concern among market participants. In this study, we
investigated how environmental, social, and governance (ESG) disclosures are associated
with future stock price crash risks in three regions: Europe, the United States, and Japan.
Bad news hoarding theory (Jin and Myers 2006) explains that information asymmetry
between inside corporate managers and outside investors leads to stock price crashes.
Several researchers have, then, argued that socially responsible firms are more likely to
be ethical in information supply and avoid bad news hoarding behavior, leading to lower
stock price crash risks. On the other hand, there exists concerns that nonethical firms may
disguise bad information from stakeholders with corporate socially responsible behaviors.
This study considered ESG disclosure as a proxy for corporate ethical behavior and
tendency toward information supply. We would expect that more active firms, regarding
ESG disclosure, are more likely to provide transparent information, leading to lower future
stock price crashes. To investigate the relationship between ESG disclosure and stock price
crash risk in three regions, we employed major market index components in each region
as samples: the Euro STOXX 600 for Europe, the S&P 500 for the United States, and the
Nikkei-225 for Japan.
We performed regression analyses on the effects of ESG disclosure on one-year-ahead

stock price crash risks after controlling for detrended turnover, past return, price-to-book
ratio, firm size, stock volatility financial leverage, returns on assets, and the absolute
discretionary value of cash flow from operating activities minus net income. Researchers
have found these control variables to be potential stock price crash determinants in studies.
We also controlled for cross-section fixed effects and time fixed effects.
We found that the ESG disclosure coefficients were not statistically significant when
using the static model. We also performed regression analyses using dynamic models
(through the GMM approach), in order to mitigate potential endogeneity bias. In the
dynamic models, ESG disclosure coefficients were significant and negative in the Euro
STOXX 600 and Nikkei-225 samples. On the other hand, they were not significant in the
S&P 500 sample. Our findings suggest that ESG disclosure can decrease stock price crash
likelihood in Europe and Japan after controlling for endogeneity. On the other hand, ESG
disclosure did not exhibit predictive power for stock price crash in the United States.
Our findings suggest that the significance of stock market determinants depends on the
region. Stock markets in different regions differ in their characteristics. There are many of
the world largest firms in the United States. According to the Global Sustainable Investment
Alliance (2018), Europe and the United States had about USD 14,075 billion and about
USD 11,995 billion of sustainable investment assets, respectively. The sustainable investing
assets managed by these two regions accounted for more than 80% of the global sustainable
investing assets. On the other hand, the proportion of sustainable investment (relative
to total managed assets) showed a significant difference: 48.8% for Europe and 25.7% for
the United States. There is a possibility that these differences in market characteristics
produced the different results in the sample for the United States.
The mean of the firm-level ESG disclosure score for the S&P 500 was the lowest among
the three market indexes. The different rating agencies employ different methodologies.
Academics and institutions have argued the transparency and reliability of ESG ratings
provided by rating agencies. Yuyama et al. (2019) found no significant relationship
between ESG disclosures and investment returns in the Japanese stock market. Arribas
et al. (2019) found no significant difference between socially responsible investments
and conventional ones in the United States. Although socially responsible firms would
show good performance in theory, some findings were consistent with the criticism of
methodologies employed by rating agencies. There is a possibility that market participants
do not consider firm-level ESG disclosures in the United States, as findings in this study
suggest. ESG disclosure lowers future stock price crash risk; however, the effect and
predictive power of ESG disclosure differ among regions.
There are some points that we must note: first, we chose major market index com-
ponents as a sample to represent stock markets and economies, for comparison among
regions. Our empirical results may reflect the market situations. The listed firms on the
major market indexes tend to be large and a future research topic will be whether small
firms benefit from ESG disclosures. Furthermore, the stock markets may differ depending
upon the maturity of the market. It will be an issue for future studies to apply a similar
methodology to other markets in developing countries. Second, the ESG scores provided
by different rating providers are different. Kim et al. (2014) found that CSR performance
coefficients (MSCI ESG) were significant in a sample of U.S. firms. Although ESG disclosure
differs from its performance, the two can be confused.
Author Contributions: Formal analysis, R.M.; investigation, R.M.; data curation, R.M.; writing—
original draft preparation, R.M.; writing—review and editing, S.H.; supervision, S.H.; funding
acquisition, S.H. All authors have read and agreed to the published version of the manuscript.
Funding: This work was supported by JSPS KAKENHI Grant Number 17H00983.
Data Availability Statement: The data source of our study is Bloomberg.
Acknowledgments: We are grateful to two anonymous reviewers for their helpful comments and
suggestions.
Conflicts of Interest: The authors declare no conflict of interest.
Appendix A. Variables Definitions

1. Crash risk variables NCSKEW is the negative coefficient of skewness of firm-specific
weekly returns over the year. DUVOL is the down-to-up volatility, calculated as the
natural logarithm of the ratio of the standard deviation of firm-specific weekly returns
in down weeks to those in up weeks. Firm-specific return is defined as the natural
logarithm of one plus the residual from the following regression model:
r j,τ = α j + β 1.j rm,τ −2 + β 2.j rm,τ −1 + β 3.j rm,τ + β 4.j rm,τ +1 + β 5.j rm,τ +2 + ε j,τ .
2. ESG variables ESG_SCORE is the Bloomberg ESG disclosure score from the Bloomberg
database. E_SCORE is the Bloomberg environmental disclosure score from the
Bloomberg database. S_SCORE is the Bloomberg social disclosure score from the
Bloomberg database. G_SCORE is the Bloomberg governance disclosure score from
the Bloomberg database.
3. Control variables DTURNOVER is the detrended turnover, calculated as the average
turnover over the current year minus the average turnover over the previous year;
turnover is calculated as the monthly trading volume divided by the total number of
shares outstanding during the month. RET is past returns calculated as the mean of
firm-specific weekly returns during a given period times 100. PBR is the price-to-book
ratio, defined as the price per share divided by book value per share. SIZE is the
firm size, calculated as the natural logarithm of the market value of equity. SIGMAR
is the stock volatility, calculated as the standard deviation of firm-specific weekly
returns. LEV is the financial leverage, calculated as total long-term debts divided by
total assets. ROA is the returns on assets, calculated as profit before tax divided by
total assets. ABACC is the absolute discretionary value of cash flow from operating
activities minus net income, as estimated from the Jones model.
Appendix B. Correlation Matrix
Table A1. Correlation matrix for Euro STOXX 600 members.
Variable A B C D E F G H I J K
NCSKEW A 1.00
DUVOL B 0.92 1.00
ESG_SCORE C 0.04 0.03 1.00
DTURNOVER D 0.12 0.13 −0.03 1.00
RET E −0.60 −0.72 0.01 −0.02 1.00
PBR F −0.03 −0.03 −0.02 −0.00 0.02 1.00
SIZE G −0.00 −0.01 0.47 0.00 0.09 −0.01 1.00
SIGMAR H 0.11 0.07 −0.19 0.07 −0.14 −0.02 −0.30 1.00
LEV I 0.02 0.03 0.08 −0.01 −0.01 0.03 −0.02 −0.02 1.00
ROA J −0.03 −0.03 −0.09 0.01 0.04 0.24 −0.00 −0.05 −0.12 1.00
ABACC K −0.01 −0.02 −0.02 0.05 0.04 −0.00 −0.02 0.07 0.03 −0.00 1.00
Table A2. Correlation Matrix for S&P 500 members.
NCSKEW A 1.00
DUVOL B 0.92 1.00
ESG_SCORE C 0.05 0.06 1.00
DTURNOVER D 0.08 0.09 0.06 1.00
RET E −0.61 −0.72 −0.03 −0.10 1.00
PBR F −0.02 −0.02 0.01 0.02 0.02 1.00
SIZE G −0.01 −0.00 0.49 0.04 0.04 0.05 1.00
SIGMAR H 0.04 0.01 −0.18 0.12 −0.11 −0.02 −0.32 1.00
LEV I 0.02 0.03 0.12 0.07 −0.03 0.12 −0.02 −0.01 1.00
ROA J −0.02 −0.03 −0.01 −0.03 0.09 0.09 0.14 −0.17 −0.19 1.00
ABACC K −0.00 −0.01 0.02 0.01 0.02 −0.00 0.00 0.02 0.00 0.01 1.00
Table A3. Correlation Matrix for Nikkei-225 members.
NCSKEW A 1.00
DUVOL B 0.92 1.00
ESG_SCORE C 0.04 0.03 1.00
DTURNOVER D 0.00 −0.02 −0.02 1.00
RET E −0.60 −0.72 0.06 0.04 1.00
PBR F −0.11 −0.13 −0.24 0.01 0.16 1.00
SIZE G 0.03 0.02 0.22 −0.01 0.02 0.10 1.00
SIGMAR H 0.01 −0.02 −0.26 0.29 −0.09 0.15 −0.28 1.00
LEV I −0.03 −0.03 −0.02 −0.02 −0.00 −0.11 −0.06 0.03 1.00
ROA J 0.07 0.08 −0.11 −0.00 −0.06 0.49 0.22 0.04 −0.32 1.00
ABACC K −0.02 −0.03 −0.15 0.03 0.04 0.15 −0.04 0.17 0.01 −0.03 1.00
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Journal of

Risk and Financial

Keywords: ESG; stock price crash risk; crash risk measure

J. Risk Financial Manag. 2021, 14, 70. https://doi.org/10.3390/jrfm14020070 https://www.mdpi.com/journal/jrfm

Engagement and Shareholder Action,” using shareholder power to influence corporate

Table 1. The six principles of responsible investment.

We will incorporate ESG issues into investment analysis and decision-making

prosperity—was formally adopted at the UN Summit held in September 2015 (United

2.2. ESG Disclosure

3.2. Environmental, Social, and Governance Ratings

3.3. Crash Risk Measures

where n denotes the number of weekly returns during year t.

3.4. Explanatory Variables

Table 2. Descriptive statistics for Euro STOXX 600 members.

Variable N Mean Median Stdev ADF Test

Table 3. Descriptive statistics for S&P 500 members.

Variable N Mean Median Stdev ADF Test

Table 4. Descriptive statistics for Nikkei-225 members.

Variable N Mean Median Stdev ADF Test

4.2. The Effect of ESG Disclosure on Crash Risk

Euro STOXX 600 S&P 500 Nikkei-225

Coefficients of environmental, social, and governance (ESG) disclosures were not

Euro STOXX 600 S&P 500 Nikkei-225

As well as the results of analyses in the static model, coefficients of environmental,

4.3. ESG Disclosure Components

Euro STOXX 600 S&P 500 Nikkei-225

Euro STOXX 600 S&P 500 Nikkei-225

Euro STOXX 600 S&P 500 Nikkei-225

Euro STOXX 600 S&P 500 Nikkei-225

We performed regression analyses on the effects of ESG disclosure on one-year-ahead

Conflicts of Interest: The authors declare no conflict of interest.

Appendix A. Variables Definitions

Appendix B. Correlation Matrix

Table A1. Correlation matrix for Euro STOXX 600 members.

Table A2. Correlation Matrix for S&P 500 members.

Table A3. Correlation Matrix for Nikkei-225 members.

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