Learning ESG from stock prices : Evidence from a quasi-natural experiment in China

This study examines the impact of stock market liberalisation on managerial environmental, social and governance (ESG) learning from stock prices. Using a quasi-natural experiment, specifically the Shanghai-Hong Kong Stock Connect (SHHKC) and Shenzhen-Hong Kong Stock Connect (SZHKC), we find that stock market liberalisation enhances firms' ESG expenditure sensitivity to stock prices, implying that managers extract greater amounts of ESG information from stock prices. Additionally, the mechanism test shows that liberalisation influences managerial learning by enabling stock prices to incorporate foreign investors' private ESG information at both aggregated and granular levels. Moreover, we demonstrate the specific ESG information that managers acquire from stock prices. We also find that the learning effects are stronger for firms in polluting industries, without ESG-proficient managers, and without access to alternative learning channels, lending further support to managerial ESG learning from stock prices. Finally, we demonstrate that the increase in ESG expenditure leads to subsequent ESG performance improvement. Our findings provide the managerial implication that managers under transformation pressure may seek information from ESG-related stock price reactions. © 2024 Accounting and Finance Association of Australia and New Zealand.