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Session Overview
CFGE-8: Corporate Social Responsibility
Saturday, 24/Aug/2019:
9:00 - 10:30

Session Chair: Nuno Fernandes, Católica Lisbon and ECGI
Location: D -107

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ESG Shareholder Engagement and Downside Risk

Andreas Hoepner1, Ioannis Oikonomou2, Zacharias Sautner3, Laura Starks4, Xiaoyan Zhou5

1University College Dublin (UCD); 2Henley Business School; 3Frankfurt School of Finance & Management; 4University of Texas at Austin; 5University of Oxford, United Kingdom

Discussant: Andrey Golubov (University of Toronto)

We examine whether engagement on environmental, social and governance (ESG) issues can benefit shareholders by reducing firms’ downside risk, measured using the lower partial moment and value at risk. Using a proprietary database, we provide evidence supporting this hypothesis. We further find that the measured risk effects vary across engagement success and engagement themes. Engagement appears most effective in lowering downside risk when addressing environmental topics (primarily climate change). We find corroborating evidence in that successful engagement reduces the firm’s exposure to a downside-risk factor.

efa2019-CFGE-8-1412-ESG Shareholder Engagement and Downside Risk.pdf

Standing out from the crowd via ESG engagement: Evidence from non-fundamental-driven price pressure

Lei Gao1, Jack He2, Julie Wu3

1Iowa State University, United States of America; 2University of Georgia; 3University of Nebraska – Lincoln

Discussant: Michael Hertzel (Arizona State University)

Prior literature proposes that firms engage in environmental, social, and governance (ESG) activities to signal their quality to investors and other stakeholders. We test this prediction by identifying exogenous situations that call for signaling. Using two independent quasi-natural experiments that impose non-fundamental-driven negative pressure on stock prices, we find that firms under such adverse circumstances engage more in ESG than otherwise similar firms. These effects are more pronounced among firms with stronger signaling needs, namely, those facing greater information asymmetry and operating in more competitive product markets. We also find that such strategic ESG engagement helps lower signaling firms’ cost of equity capital.

efa2019-CFGE-8-1444-Standing out from the crowd via ESG engagement.pdf

Real Effects of Climate Policy: Financial Constraints and Spillovers

Söhnke M. Bartram1, Kewei Hou2, Sehoon Kim3

1University of Warwick, United Kingdom; 2The Ohio State University, United States of America; 3University of Florida, United States of America

Discussant: Micah Officer (Loyola Marymount University)

We document that localized policies designed to mitigate climate risk can lead to regulatory arbitrage by firms, resulting in unintended consequences. Using detailed plant level data, we investigate the impact of the most extensive regional climate policy in the United States, the California cap-and-trade program, on corporate real activities such as greenhouse gas emissions and plant ownership. We show that industrial plants governed by the policy reduce emissions in California when the parent company is financially constrained, but that these firms internally reallocate their emissions to plants located in other states. Similarly, constrained firms are more likely to reduce ownership in Californian plants and increase ownership in plants outside California. In contrast, unconstrained firms generally do not adjust plant emissions and ownership either in California or in other states. Overall, firms do not reduce their total emissions when part of their assets are affected by the regulation, but in fact increase them if financially constrained. The results document real spillover effects stemming from resource reallocations by constrained firms to avoid regulatory costs, undermining the effectiveness of localized policies. Our study has important implications for the current debate on global climate policy agreements.

efa2019-CFGE-8-1464-Real Effects of Climate Policy.pdf

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