Companies suddenly start acting all 'ethical' and 'green' the second one of their business partners gets caught doing something illegal.
March 20, 2026
Original Paper
Reputational Penalty Spillover of Financial Fraud and ESG Performance: Evidence from Director-Interlocked Firms
SSRN · 6443953
The Takeaway
This reveals that ESG (Environmental, Social, and Governance) performance often acts as 'reputation insurance.' Companies don't just invest in social good because of their own values, but as a strategic response to mitigate the 'spillover' of a partner's criminal activity to their own stock price.
From the abstract
The spillover effects of reputational penalties resulting from peer firms’ unethical behavior is a widespread phenomenon, yet little is known about how firms respond to such effects. This study addresses this gap by examining whether firms engage in ESG activities in response to reputational penalty spillovers from financial fraud committed by peer firms that share common directors. Using a stacked difference-in-differences model, we find a significant increase in ESG performance following peers