Dynamic ESG Preferences and Asset Prices

50 Pages Posted: 26 Feb 2019 Last revised: 27 Jul 2020

See all articles by Yao Chen

Yao Chen

University of Exeter Business School

Alok Kumar

University of Miami - Miami Herbert Business School

Chendi Zhang

University of Exeter Business School

Date Written: July 20, 2020

Abstract

This paper shows that shifts in investor preferences for Environmental, Social, and Governance (ESG) attributes affect asset prices. Using Internet search volume to capture ESG sentiment shifts, we propose a novel firm-level measure of return sensitivity to ESG sentiment (i.e., ESG beta). We find that ESG beta does not predict firm profits but stocks with more positive ESG beta earn higher abnormal returns and attract more investor demand. This predictability is stronger among firms headquartered in regions with high Republican concentration and stronger beliefs against ESG issues. Overall, these results suggest that financial markets misprice firm-level ESG attributes.

Keywords: corporate social responsibility; investor attention, socially responsible investing, return predictability, social sentiment.

JEL Classification: G02, G11, G12

Suggested Citation

Chen, Yao and Kumar, Alok and Zhang, Chendi, Dynamic ESG Preferences and Asset Prices (July 20, 2020). Available at SSRN: https://ssrn.com/abstract=3331866 or http://dx.doi.org/10.2139/ssrn.3331866

Yao Chen

University of Exeter Business School ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Alok Kumar

University of Miami - Miami Herbert Business School ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Chendi Zhang (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

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