Corporate Social Responsibility and Market Efficiency: Evidence from ESG and Misvaluation Measures
65 Pages Posted: 21 Apr 2020 Last revised: 5 Oct 2021
Date Written: August 19, 2020
We study the impact of corporate social responsibility (CSR) on firm misvaluation in the US. Our results indicate that a firm's Environmental, Social and Governance (ESG) profile significantly affects valuation: an improvement of a firm's CSR 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 both valuation effects are attributable to the worldwide trend of sustainable investing. Further analyses reveal a moderating role of market sentiment towards sustainability in the ESG-misvaluation relationship. Our findings suggest that firms‘ CSR is indeed perceived as valuable by shareholders and supports stakeholder theory's view in considering CSR as beneficial.
Keywords: Corporate social responsibility; ESG; misvaluation; sustainable investing; \\ market efficiency; sentiment
JEL Classification: G14, G32, M14, Q5
Suggested Citation: Suggested Citation