Corporate Social Responsibility and Market Efficiency: Evidence from ESG and Misvaluation Measures
55 Pages Posted: 21 Apr 2020 Last revised: 3 Sep 2020
Date Written: August 19, 2020
We study the impact of corporate sustainability on market efficiency in the US. Our results indicate that a firm’s Environmental, Social and Governance (ESG) profile significantly affects valuation: an enhancement of a firm’s corporate sustainability leads to a higher ratio of actual to true firm value. Analyzing the relation between ESG and misvaluation separately, we find that ESG expands existing overvaluation whereas it reduces undervalued firms' deviation from the true value. We argue that the extension of overvaluation is driven by the worldwide trend to invest sustainably. The reduction in undervaluation, however, is attributable to increasing information availability to capital markets. Further analyses reveal a moderating role of market sentiment towards sustainability in the ESG-misvaluation relationship.
Keywords: Corporate social responsibility; ESG; sustainability; misvaluation; sustainable investing; market efficiency; ESG preference; stock misvaluation; sentiment
JEL Classification: G14, G32, M14, Q5
Suggested Citation: Suggested Citation