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This research aims to explore the relationships between organizational friction, ESG ratings, and firm risk and performance using a novel framework.

April 17, 2026Open Access

Organizational Friction and Regime- Dependent Pricing: Evidence from the "S" Pillar of ESG

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This research aims to explore the relationships between organizational friction, ESG ratings, and firm risk and performance using a novel framework.
Introduced a structural ESG framework based on the Life-Value Reflow model.
Identified and analyzed a reflow signal-to-noise ratio (SNR) through natural language processing of employee reviews.
Examined financial performance data from mega-cap U.S. firms over a 33-month stress-test window.
Scaled results across a broader cross-section of U.S. equities using Residual Organizational Friction Momentum (OFM).
A decline in SNR strongly predicts higher future tail risk in firms.
In normal market conditions, OFM achieved a Fama-French alpha of 1.23% monthly.
During the liquidity-concentration regime, OFM's premium disappeared, resulting in a cumulative return of -0.68%.
Over the entire stress-test period, unconditional returns were 0.568% monthly, with a Fama-French alpha of 0.697%.
OFM showed a negative association with future downside volatility in stress periods.

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Demonstrates how organizational friction impacts firm risk and pricing based on ESG signals, highlighting important market dynamics.

guoyong chen (2026) studied this question.

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