ESG Preference and Market Efficiency: Evidence from Mispricing and Institutional Trading

47 Pages Posted: 9 Apr 2019 Last revised: 4 Nov 2019

See all articles by Jie Cao

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Weiming Elaine Zhang

The Chinese University of Hong Kong (CUHK)

Date Written: March 12, 2019

Abstract

We explore how the trend towards socially responsible investing affects the informational efficiency of stock prices. The return predictability of mispricing signals is much stronger among firms held by more socially responsible (SR) institutions. The results are driven by the divergence of trading implications from ESG performance and mispricing signals. SR institutions are less likely to buy underpriced stocks with poor ESG scores or sell overpriced stocks with high ESG scores. We rule out alternatives, such as known limits to arbitrage. The inefficiency only emerges in recent years with the rise of ESG investing, and is not fully offset by ESG-neutral arbitrageurs due to funding liquidity constraints.

Keywords: Socially responsible institutions; stock mispricing; ESG preference; market efficiency

JEL Classification: G14; G23; G41; M14

Suggested Citation

Cao, Jie and Titman, Sheridan and Zhan, Xintong and Zhang, Weiming Elaine, ESG Preference and Market Efficiency: Evidence from Mispricing and Institutional Trading (March 12, 2019). Available at SSRN: https://ssrn.com/abstract=3353623 or http://dx.doi.org/10.2139/ssrn.3353623

Jie Cao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

HOME PAGE: http://sites.google.com/site/jiejaycao

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, NT
Hong Kong

HOME PAGE: http://sites.google.com/view/xintongzhan

Weiming Elaine Zhang

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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