ESG Should Be ES+G : Reassessing the Effect of Corporate Social Responsibility on the Market Reaction to Negative Financial Events

We extend recent research on the relationship between corporate social responsibility (henceforth, CSR) and market reactions to accounting restatements (Bartov et al., 2020; Wans, 2020). Drawing on strategic CSR, relational contract, and psychological contract theories, we conjecture that corporate citizenship and corporate governance aspects of CSR have opposite effects on market reactions to accounting restatements. Our empirical analysis reveals that firms with higher levels of corporate citizenship reputation experience significantly less negative market reactions to restatement announcements. Conversely, a firm’s reputation for excellence in corporate governance exacerbates the negative surprise triggered by restatements. The value-saving (value-destroying) effect of corporate citizenship (corporate governance) reputation is more prominent for fraudulent restatements. A key takeaway from our study is that the popular ESG framework of CSR reporting can be improved by treating environmental and social initiatives (ES) separately from governance initiatives (G)