ESG and stock price crash risk mitigation: evidence from Korea

We examine whether ESG (environmental, social and governance) engagement mitigates firm crash risk for firms in the Korean market. For a sample of firms listed on the Korean Stock Exchange from 2012 to 2021, we find that firm engagement in ESG activities reduces future firm crash risk but not during the COVID-19 crisis. This finding is robust to correction for endogeneity using two different instruments and a difference-in-differences methodology. We further document that this finding is driven by the environment and governance dimensions of ESG, and that the mitigation role of ESG is more pronounced for less financially constrained firms. Although the mitigation effect is important for all industries, it is more pronounced for ESG-sensitive industry firms than for non-ESG-sensitive firms. The results serve as a clarion call for all firms, whether belonging to an ESG-sensitive industry or not, to actively engage in ESG activities. The results for the crisis period also have the implication that firms need other strategic tools in addition to ESG engagement in times of crisis.