How Managed and Unmanaged ESG Risks Affect Firm Stock Price Crash Risk

ABSTRACT This paper examines how the decomposition of Environmental, Social, and Governance (ESG) risk into managed and unmanaged components relates to stock price crash risk. Using a panel of 2778 U.S. firms from 2018 to 2023, comprising 12,472 firm‐year observations, we find a positive association between elevated ESG risks and future stock price crash risk. Our analysis identifies unmanaged ESG risk as the primary driver of this relationship, while managed ESG risk exhibits no significant effect. Furthermore, the impact of unmanaged ESG risk is more pronounced in mature firms, financially distressed firms and large firms. Our findings remain robust after addressing endogeneity concerns, excluding financial and utility firms, removing the COVID‐19 period, and controlling for external risk factors such as economic policy uncertainty, equity market volatility and geopolitical risk.