Sample Selection Bias and Collinearity in Analyzing ESG Ratings and Stock Returns in Taiwan

The popularity of ESG investing has led to researches on whether the investment brings higher returns. In Taiwan, the CommonWealth Magazine, since 2007, has granted CSR awards to 100 companies each year. We test whether these companies give investors better returns. Since a firm’s participation in the competition is an endogenous variable, we first address the sample selection bias issue using Heckman’s (1979) two-stage regression. Although the coefficient of the inverse Mills’ ratio is insignificant, we find that there is collinearity in the Heckman regression. After removing the collinearity, we conclude that the returns of good ESG company are not higher than other companies.