ESG decoupling and stock price crash risk

Purpose This study examines and compares the impact of environmental, social and governance decoupling (ESGD) on stock price crash risk (SPCR) in the USA and China, considering their differing ESG regulations and market conditions. ESG regulations are voluntary in the USA but fall under government policy in China; therefore, the authors expect a stronger detrimental impact of ESGD on SPCR in China than in the USA. The study also examines the moderating role of investor sentiment on the relationship between ESGD and SPCR. Design/methodology/approach Using ESG-flagged firms from Refinitiv DataStream (2008–2022), this study analyses 10,154 firm-year observations for the USA and 1,957 for China. It controls for firm- and year-fixed effects and clusters industries through a high-dimensional panel fixed-effects regression. Findings Consistent with the expectation, ESGD increases SPCR in Chinese decoupler firms (i.e. ESG disclosures exceed ESG performance) but not US firms. This effect is more pronounced in Chinese non-state-owned enterprises, as their ESG disclosures might exceed actual performance to comply with strict ESG regulations. In addition, high investor sentiment does not moderate the strength or direction of the relationship between ESGD and SPCR in either country. Originality/value This study provides a novel cross-country analysis of the ESGD–SPCR relationship between the USA and China. Considering differing ESG regulations and market conditions in both countries, it highlights the stronger detrimental impact of ESGD on SPCR in China due to compulsory ESG regulations. This research contributes to the literature on ESG practices, market risks and corporate governance.