Environmental, Social, and Governance Bonds and Stock Market Reactions: An Event Study

Abstract

As environmental, social, and governance (ESG) bonds have become a fundamental tool in corporate strategies for financing sustainability, an understanding of how stock markets react to their issuance is essential. Based on the efficient market hypothesis (EMH) and signaling theory, this event study uses 3618 ESG bond issuances from 2021 to 2023 to investigate stock market reactions around the issuance date and to test how those reactions vary with use-of-proceeds flexibility. The results reveal a negative market response, particularly when the use of proceeds is inflexible. These findings suggest that, while ESG bond issuance signals a commitment to sustainability, it may also raise concerns about financial constraints, prompting investor reassessment. The study extends EMH and signaling theory to the sustainable finance context and adds to ESG bond literature by examining the role of fund allocation flexibility. Overall, the results highlight the importance of transparent reporting, as clear communication about ESG bond objectives and benefits appears essential to sustaining investor confidence.