Investor Sentiment and the Time-varying Sustainability Premium

40 Pages Posted: 9 Jan 2020 Last revised: 17 Nov 2020

See all articles by Vitor Azevedo

Vitor Azevedo

Technische Universität München (TUM), Department of Financial Management and Capital Markets

Christoph Kaserer

Technische Universität München (TUM)

Lucila M. S. Campos

Federal University of Santa Catarina (UFSC)

Date Written: November 28, 2019

Abstract

Previous literature shows inconclusive results regarding the relation between Corporate Social and Environmental Responsibility (CSR and CER) and expected returns. We argue that the reason for these mixed results is that the sustainability premium, i.e., the return difference of high-intensity minus low-intensity CSR/CER firms, is time-varying and correlated with investor sentiment. We find that high-intensity CSR (CER) firms have a monthly excess return of 0.70 (0.88) p.p. higher following periods of low investor sentiment as compared to periods of high sentiment. Given that standard pricing factors cannot fully explain the abnormal returns caused by investor sentiment on the sustainability premium, we propose a sustainability pricing factor, estimated as the second principal component of portfolios sorted based on environmental and social variables, which corrects this mispricing.

Keywords: sustainability, corporate social responsibility, corporate environmental responsibility, expected returns, financial performance, investor sentiment

JEL Classification: G12, G19, M41

Suggested Citation

Azevedo, Vitor and Kaserer, Christoph and M. S. Campos, Lucila, Investor Sentiment and the Time-varying Sustainability Premium (November 28, 2019). Available at SSRN: https://ssrn.com/abstract=3495112 or http://dx.doi.org/10.2139/ssrn.3495112

Vitor Azevedo (Contact Author)

Technische Universität München (TUM), Department of Financial Management and Capital Markets ( email )

Munich, 80333
Germany

Christoph Kaserer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

Lucila M. S. Campos

Federal University of Santa Catarina (UFSC)

Florianopolis, SC 88062-451
Brazil

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