ESG Preference, Institutional Trading, and Stock Return Patterns

Abstract

Socially responsible (SR) institutions tend to focus more on the ESG performance and less on quantitative signals of value. Consistent with this difference in focus, we find that SR institutions react less to quantitative mispricing signals. Our evidence suggests that the increased focus on ESG may have influenced stock return patterns. Specifically, abnormal returns associated with these mispricing signals are greater for stocks held more by SR institutions. The link between SR ownership and the efficacy of mispricing signals only emerges in recent years with the rise of ESG investing, and is significant only when there are arbitrage-related funding constraints.

Keywords: ESG preference; institutional trading; stock mispricing; stock return patterns

JEL Classification: G23; G41; G14; M14