Corporate ESG Profiles and Investor Horizons

Abstract

We find that long-term institutional investors tilt their portfolios towards firms with better ESG profiles both in the cross-section and after new information on ESG improvements. We test whether several theoretically motivated mechanisms can explain the relationship between investor horizon and firms' ESG profiles. Long-term investor patience around poor earnings announcements suggests that investors evaluate short and long-term information differently. In addition, our evidence shows that limits-to-arbitrage plays a role as we find investors' ESG tilting weakens following regulatory shocks that shorten their horizon. We find no evidence that clientele catering drives this relationship.

Keywords: Corporate ESG, Investor Horizons, Corporate Short-Termism

JEL Classification: G34, G23, G00