Research roundup: Communicating in times of Covid-19

Apr 13, 2021
Evidence to date shows stock markets react positively to ESG – when times are good. But a crisis brings a new and surprisingly complex set of dynamics

Does CSR matter in a crisis?
Not when it comes to stock price performance. A study of 1,750 US firms finds no link between pre-Covid-19 crisis CSR scores and stock returns during either the pandemic-induced market crash or the recovery.

Notably, Business Roundtable member companies, run by CEOs demonstrating an explicit interest in serving the interests of broader stakeholders, fared no differently from other firms. Study authors say their findings suggest several interpretations, one being a potential disconnect between CSR ratings (in this case those offered by Refinitiv and MSCI) and a company’s actual actions.

‘A high CSR rating won’t protect you in times of crisis,’ says Kee-Hong Bae, professor of finance at York University’s Schulich School of Business in Canada.

Noting a ‘discouraging inconsistency’ in Business Roundtable company responses to the pandemic, Bae says IR credibility has emerged as an issue. ‘One would expect better stock price performance from CSR-active firms during the crisis period if those activities genuinely met the stakeholders’ growing demand for CSR caused by the pandemic,’ he says. ‘But that hasn’t happened – which suggests investors can tell the difference between real CSR performance and cheap talk.’

Tick that box: ESG disclosure quantity dampens Covid-19 shock
Many academic analyses have demonstrated the resilience of ESG investment funds during the Covid-19 pandemic. But these funds tend to underweight the most vulnerable industry sectors. A new study proves that individual company ESG reporting transparency can mitigate certain aspects of Covid-19’s unexpected shock – but still can’t aid stock performance.

Using a Bloomberg disclosure score based on the quantity of ESG data disclosed by UK listed firms, researchers say companies with higher scores enjoyed reduced share price volatility during the pandemic’s initial stages. Better ESG transparency also blunted other negative internal and external crisis factors such as lockdown announcements, the growing number of Covid-19-positive cases, oil prices and analyst recommendations.

‘ESG disclosure transparency plays a big role in the resilience of firms against the effects of the pandemic,’ says study co-author Thi Hong Van Hoang, associate professor of finance at Montpellier Business School. ‘[Even if the news isn’t good], investors appear to reward companies that display a motivation to improve performance on the ESG dimensions.’

Information insensitive
Despite the extraordinary rise in retail investors’ participation in equity markets during the pandemic, a team of Spain-based investigators finds dramatic decreases in Google searches for individual US stocks after March 8, even around earnings announcements. Study authors speculate their surprising results may reflect the possibility that the new retail cohort is not information-sensitive.

‘Another possible explanation is that these investors rely on other channels of information such as social media or stock-trading apps themselves,’ says study co-author Hang Dong, assistant professor in finance at IE University. ‘In any case, the fact that total searches decreased suggests the pandemic may have diverted the attention of retail investors as a whole.’

In a related study, Canadian researchers say the Covid shock crowded out investor attention to all other risk information. Analysis shows mention of non-Covid-related risks in either US company Q1 2020 earnings conference calls or the risk factor disclosure section of annual reports triggered no short-term market reaction. The study also uncovers a negative market reaction to firms that applied for the SEC’s extension on filing deadlines.

‘It may not be optimal for a company to seek regulatory relief if such an action suggests or communicates bigger problems,’ notes study co-author Betty Xing, now an assistant professor of accounting and business law at Baylor University. ‘Companies that decide to do so might consider prepping investors for the news.

'Catching them by surprise, when faced with an unprecedented amount of uncertainty, may lead them to assume a situation is worse than it really is.’

Research from around the world

  • A University of Hamburg analysis of 300 international firms finds those that published their 2019 annual report in early 2020 and mentioned the pandemic (about 70 percent) saw decreased beta values and better abnormal returns compared with those that did not.
  • Only 21 percent of 10K filings in 2018 forewarned shareholders with any reference to pandemic-related terms. Researchers at the University of Notre Dame conclude ‘this number should have been higher’. In a related study, investigators at Kuhne Logistics University say US firms that disclosed pandemic risk – especially smaller ones – encountered much greater stock return volatility during the pandemic. They write: ‘The stock returns of disclosing firms fell significantly more at the start of the pandemic, but also increased more during the initial recovery phase than [stock returns of] non-disclosing firms.’
  • An examination of portfolio changes of US stocks through the first half of 2020 reveals that institutional investors prioritized corporate financial strength over ‘soft’ environmental and social performance. Meanwhile, retail investors acted as liquidity providers. Researchers conclude: ‘When a tail risk realizes, institutional investors amplify price crashes by fire-selling and seeking shelter in hard measures of [company] resilience.’
  • Divestment pays. BlackRock’s thermal coal divestment announcement last year was followed by significant abnormal share price drops in US coal mining companies, say researchers. Investors, meanwhile, rewarded the fund manager. Said one analyst at the time: ‘ESG is one of the strongest headwinds facing the [coal mining] industry today.’

This article originally appeared in the Spring 2021 issue of IR Magazine. 

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