ESG Preference, Institutional Trading, and Stock Return Patterns
42 Pages Posted: 9 Apr 2019 Last revised: 1 Apr 2020
Date Written: March 31, 2020
Socially responsible (SR) institutions tend to focus more on the ESG performance and devote less attention to quantitative signals of value. We conjecture that this implies that stocks with high SR institutional ownership underreact to quantitative mispricing signals. Consistent with this conjecture, we find that a composite of 11 mispricing signals more reliably predicts the returns of those stocks held by more SR institutions. The link between SR institutional ownership and the efficacy of mispricing signals only emerge 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
Suggested Citation: Suggested Citation