On the relationship between government subsidies, ESG performance and the stock market

This thesis examines the interactions between government subsidies, firms’ environmental, social, and governance (ESG) performance, and stock market reactions. It focuses on how ESG-related subsidies influence corporate behaviour and investor perceptions, subsequently impacting stock market outcomes. Chapter I provides an overview and introduces the research objectives of the thesis. Chapter II demonstrates that higher ESG subsidies lead to significant improvements in firms’ ESG performance, particularly after the Paris Agreement. These improvements are more pronounced among larger firms and state-owned enterprises (SOEs) compared to their counterparts. Chapter III employs event study methodology to illustrate that positive stock market reactions to ESG subsidy policy announcements are predominantly observed among firms with robust ESG standings, highlighting investor preferences for sustainable practices. The market impact of ESG subsidies intensifies post-Paris Agreement; however, SOEs experience relatively weaker effects than non-SOEs.Chapter IV introduces Institutional Social Responsibility Concentration (ISRC), showing that stocks receiving larger allocations from socially responsible mutual funds tend to achieve higher future returns, driven by enhanced ESG performance and greater market stability. This relationship further strengthens following the Paris Agreement, underscoring the global shift toward sustainability. Chapter V concludes the thesis and outlines potential directions for future research. Collectively, this work contributes to the sustainable finance literature and provides valuable insights for policymakers, investors, and stakeholders committed to advancing corporate sustainability.