Equity valuation sensitivity to ESG ratings and the moderating role of firm profitability: evidence from the Stock Exchange of Thailand

Abstract

This study examines the short-term market reaction to changes in the Stock Exchange of Thailand’s ESG ratings, namely the Thailand Sustainability Investment (THSI) list (2016–2022) and SET ESG Ratings (2023–2025). Furthermore, this study tests whether firm profitability, measured by return on assets (ROA), moderates this reaction, based on existing theoretical literature. Using an event study methodology with the market model, the study analyses 403 firm-events (306 new inclusions and 97 removals) across ten an- nual announcements spanning 2016–2025. New inclusions were found to produce no statistically significant market reaction (CAR = 0.02%, p = 0.969), while removals were associated with negative cumulative abnormal returns of −2.27%. The removal effect reaches statistical significance at the 5% level under narrower event window specifica- tions (p = 0.021 for [−3, +3] and p = 0.027 for [−1, +1]). A supplementary granular analysis of the 2023–2025 period, during which the SET introduced letter-grade ratings, reinforces this pattern: removals produce strongly significant negative returns (−5.10%, p < 0.01) and upgrades generate a modest positive effect (+1.06%, p < 0.05). However, given the limited sample size of three years, this stronger result should be treated as a descriptive and supplementary analysis to the main binary regression results. Profitability moderation is not statistically significant (p = 0.388), consistent with the broader empirical literature. These findings suggest that investors respond more strongly to negative ESG rating news than to positive ESG inclusion, consistent with the view that positive ESG information may be more easily anticipated than removal events.