Corporate Social Responsibility and Market Efficiency: Evidence from ESG and Misvaluation Measures

55 Pages Posted: 21 Apr 2020 Last revised: 3 Sep 2020

See all articles by Yannik Bofinger

Yannik Bofinger

Justus-Liebig-University Giessen

Kim J. Heyden

Justus Liebig University Giessen

Björn Rock

Justus-Liebig-University Giessen

Date Written: August 19, 2020

Abstract

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

Bofinger, Yannik and Heyden, Kim J. and Rock, Björn, Corporate Social Responsibility and Market Efficiency: Evidence from ESG and Misvaluation Measures (August 19, 2020). Available at SSRN: https://ssrn.com/abstract=3571211 or http://dx.doi.org/10.2139/ssrn.3571211

Yannik Bofinger (Contact Author)

Justus-Liebig-University Giessen ( email )

Licher Str. 64
Giessen, 35394
Germany

Kim J. Heyden

Justus Liebig University Giessen ( email )

Licher Str. 64
Giessen, 35394
Germany

Björn Rock

Justus-Liebig-University Giessen ( email )

Licher Str. 64
Giessen, 35394
Germany

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