How does ESG ratings impact information asymmetry in European stock markets?

Abstract

This study investigates the relationship between environmental, social and governance (ESG) performance and information asymmetry in European financial markets. Using a panel dataset of large-cap European firms between 2020-2024, the analysis employs three proxies for information asymmetry: bid-ask spread, trading volume, and return volatility. A firm-level fixed effect regression model is used to control for time-invariant characteristics. The results indicate a negative association between ESG performance and all three proxies, suggesting that higher ESG scores may be linked to lower levels of information asymmetry. However, the relationship is not uniformly significant and further research is needed. The connection between information asymmetry and ESG is to our knowledge underexplored within the broader European context and therefore this study aims to fill that gap. As the link between ESG and information asymmetry remains underexplored in the European context, this study contributes with new empirical evidence to an emerging area of academic interest.