Market perceptions of ESG reputational risk in the US pharmaceutical industry

Abstract

Negative ESG‐related reputational events generate significant corporate risks, particularly within sensitive sectors such as the pharmaceutical industry. Using novel reputational data, this research investigates investor perceptions of the consequences of experienced ESG breaches among US pharmaceutical firms. Specifically, we consider the magnitude, timing, and persistence of abnormal returns, testing whether firm‐specific characteristics and event‐related attributes moderate and account for identified market response differentials. Results indicate the presence of significant negative abnormal returns before the identified media release date, suggesting market anticipation or information leakage, followed by a pronounced negative shock upon formal announcement, with firm size the most robust mitigating factor. Market response shows substantial heterogeneity, while environmental incidents generate significant, delayed negative returns, whereas social and governance events show negligible investor response, indicating a lack of market concern. Companies experiencing recurring incidents experience further deterioration of returns than first‐time offenders. Neither the initial news source's reach nor the assessed severity significantly affects the magnitude of market response. These findings highlight the context‐dependent nature of ESG materiality in the pharmaceutical sector.