HOW DO FIRM CHARACTERISTICS AMPLIFY THE IMPORTANCE OF ESG RATINGS FOR INVESTORS?

Abstract

This study examines the moderating effects of firm characteristics on the relationship between ESG ratings and investor responses among companies listed on the Stock Exchange of Thailand (SET) by analyzing key firm attributes, namely profitability, leverage, firm size, firm age, and audit quality. The findings reveal that ESG ratings negatively affect both stock returns and stock price volatility. Furthermore, the role of firm characteristics indicates that highly profitable firms experience weaker stock return benefits from ESG improvements. This suggests that financially stable firms already command strong investor confidence, which diminishes the incremental impact of ESG ratings. Similarly, highly leveraged firms face declining stock returns as ESG ratings improve, suggesting that investors may perceive ESG investments as an additional cost rather than a risk-mitigating factor in financially constrained firms. In contrast, larger and older firms exhibit higher stock returns and lower price volatility in response to ESG ratings, likely due to their established market presence, stronger governance structures, and enhanced investor trust. Although audit quality does not appear to significantly moderate the ESG-stock return relationship, it contributes to reducing stock price volatility, emphasizing the importance of financial transparency in stabilizing market reactions. These findings underscore the differentiated impact of ESG ratings across firms, highlighting that investor responses to ESG performance are not uniform but rather contingent on firm-specific financial attributes. This study reinforces the necessity of integrating firm characteristics into ESG-related financial analyses and provides valuable insights for investors, corporate managers, and regulatory bodies seeking to enhance market stability and investment efficiency in the evolving landscape of sustainable finance.