The effect of ESG on stock liquidity in Malaysia

Chek, En Ye (2024) The effect of ESG on stock liquidity in Malaysia. Final Year Project, UTAR.

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Abstract

In the most recent years, a wider trend towards sustainable and ethical business behavior is influenced in the growing importance of Environmental, Social, and Governance (ESG) standard in the business and investment sectors. This had led to asset managers and institutional investors complying with ESG factors as become a part of investment strategies. When companies increasingly embark on ESG compliance, the expectation is that these expenditures will result in better stock returns and enhance liquidity for the firms’ stocks. While this concerns have been only examined in those countries with more developed markets such as the China (Chen et al., 2022, Wang et al., 2023, Chen et al., 2023, Zhang et al., 2024), Brazil and Germany (Svanes & Øyaas, 1970), United State (Tazo & Grabovac, 1970), Indonesia (Primasari et al., 2022), or Globally (Krueger et al., 2021, Shakil, 2020), however, there is still unidentified actual result in the Malaysian stock market. Therefore, this study aims to close the gap in the literature by providing evidence and insights of the relationship between ESG score and stock liquidity in Malaysia. This study implied a total of 31 publicly listed companies in Malaysia, over a 13-year sample period from 2010 to 2022, in the form of panel series data. The main findings identify that ESG score and each ESG factors have a significant negative relationship to stock liquidity. Moreover, this study found that Malaysia’ ESG is still in an early stage as there is lack of ESG compliance companies in Malaysia market which cause constraint in the liquidity. Finally, this study points out that governance acts as an important role to this problem as government should encourage and enforce the adoption of ESG principles to extend the pool of ESG compliance companies, which then help to increase the liquidity in the market. Keywords: Environmental, Social, and Governance, ESG Score, Stock Liquidity, Panel Series Data, Malaysian Stock Market.

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