CORPORATE TRANSPARENCY AND FINANCIAL STABILITY: AN ESG APPROACH TO MITIGATING STOCK PRICE CRASH RISK

Abstract

This study examines the relationship between ESG (Environmental, Social, and Governance) factors and stock price crash risk. Using a sample of 740 firms, this study analyzes whether robust ESG practices, as measured by various indices and specific indicators (Carbon Emission Reporting, Board Independence), mitigate the risk of stock price crashes, proxied by Negative Conditional Skewness (NCSKEW) and Down-to-Up Volatility (DUVOL). The descriptive statistics reveal a high prevalence of ESG practices among firms, with particularly strong governance factors. Correlation analysis shows an initial negative association between ESG performance and crash risk. Further, regression analysis provides strong evidence that a higher level of ESG engagement significantly reduces NCSKEW and DUVOL, even after controlling for firm-specific characteristics like size, Leverage, age, and profitability. These findings suggest that strong ESG performance enhances corporate transparency, builds stakeholder trust, and improves risk management, reducing the likelihood of severe negative price movements. The results underscore the importance of ESG integration for financial stability and investor protection.