Dynamic ESG Preferences and Asset Prices
50 Pages Posted: 26 Feb 2019 Last revised: 27 Jul 2020
Date Written: July 20, 2020
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
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