ESG Preference and Market Efficiency: Evidence from Mispricing and Institutional Trading
47 Pages Posted: 9 Apr 2019 Last revised: 4 Nov 2019
Date Written: March 12, 2019
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
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