Research-Thesis: How ESG shapes share buyback decisions in listed eurozone banks: evidence around the ECB distribution recommendation 2020.

Abstract

This thesis explores at the connection between Environmental, Social, and Governance (ESG) commitment and buyback activity in Eurozone banks before, during, and after the European Central Bank (ECB)’s capital distribution restrictions for the duration of the coronavirus pandemic. Although previous studies reveal that companies with strong ESG commitments have conservative policies during stressful times, no prior evidence exists to prove the effect of ESG commitment on the payout policy of banks.

Specifically, the present study uses a balanced panel of 42 publicly listed Eurozone banks over the years 2017-2022. Two-way Panel Fixed Effects regression is used to investigate if firms with higher ESG commitments were less prone to buying back stocks in the years of ECB restrictions (2020-2021). Also, the study checks whether such companies have increased buyback activities after the removal of restrictions in 2022.

The empirical evidence does not confirm the hypothesis that high-ESG banks engaged in more prudent payout practices during the period of restriction. Rather, the evidence shows that the ECB recommendation acted as a constraining factor that prevented behavioral differences related to ESG among banks during this time. However, the findings for the recovery period demonstrate that ESG commitment is linked to share repurchase following the end of the restrictions. This association stems mainly from the Governance component of ESG and less so from the Environmental and Social components.

This research makes a contribution to the literature by showing that in a heavily regulated industry, such as banking, the signaling effect associated with good governance might overshadow the stabilizer effect of ESG during the recovery phase following a crisis.