Does corporate sustainability performance mitigate the negative market reaction to the SEOs? Fresh evidence from the G-10 markets

Purpose This study investigates the relationship between firms' corporate sustainability performance, reflected in their environmental, social, and governance (ESG) scores, and the market reaction to seasoned equity offerings (SEOs), in addition to examining how stock price volatility affects this relationship. Design/methodology/approach This study utilizes a sample of 2,061 different firms that conducted 4,853 SEOs over the period from 2011 to 2022 in the G-10 countries. Both the market model and the mean-adjusted models are used to analyze the market reaction to the announcement of SEOs. In addition, a series of multivariate regressions and the Heckman self-selection approach are conducted to ensure the robustness of the results. Findings The findings reveal a positive and significant impact of ESG performance on the market reaction to SEOs. Further, this positive impact is more pronounced among stocks characterized by higher stock price volatility. This confirms the critical role that corporate sustainability practices could play in conveying favorable information that helps alleviate the negative reaction in the financial markets. Practical implications From a managerial perspective, it highlights the role of the ESG discourse as a value-protection tool that firms can utilize to mitigate the negative impacts in financial markets. For policymakers, this highlights the need to ensure the quality of firms' ESG disclosures to enhance transparency in financial markets by creating stricter regulations for ESG disclosures. Originality/value To the best of our knowledge, no previous research has investigated the nexus between ESG practices, market reactions to SEOs, and stock price volatility in the context of G10 markets. Therefore, this study extends not only the literature that focuses on corporate sustainability performance, but also enriches the corporate finance literature that investigates stock price behavior and corporate actions. This study helps provide answers to a broader question: whether firms' ESG practices can indeed play a role in conveying favorable information that helps alleviate the negative reaction in the financial markets.