Geopolitical risk and stock price crash risk: The mitigating role of ESG performance

We study the effect of geopolitical risk (GPR) on stock price crash risk and we investigate the mediating role of the ESG factors in this relationship. Using a large international sample of publicly listed firms, we find that higher GPR causes stock price crashes to occur more frequently. This result holds to several robustness checks and to the use of different measures of stock price crash risk and we rule out any potential endogeneity concern using an Instrumental Variables (IV) approach. We also find that the causal effect of GPR on crash events is mainly driven by the expectations and threats of geopolitical tensions (geopolitical threats), rather than their effective realization and escalation (geopolitical acts). However, when exploring the potential mitigating role of ESG factors, we observe these negative implications to be less severe for high ESG-rated issuers and, specifically, for firms scoring high in the Environmental and Social dimensions. Our study demonstrates that firms more engaged in ESG practices are more resilient to the GPR's adverse effect on stock price crash risk.

Automated summary

This study examines the impact of geopolitical risk on stock price crash risk, and finds that higher geopolitical risk leads to more frequent stock price crashes. The study also reveals that companies with higher ESG ratings, particularly in the Environmental and Social dimensions, are more resilient to the adverse effects of geopolitical risk on stock price crash risk.