Investment and Asset Pricing with ESG Disagreement

56 Pages Posted: 14 Oct 2020 Last revised: 23 Nov 2020

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Si Cheng

Chinese University of Hong Kong - Department of Finance

Abraham Lioui

EDHEC Business School and Scientific Beta Research Chair

Andrea Tarelli

Catholic University of Milan

Date Written: October 15, 2020

Abstract

This paper analyzes the equilibrium implications of ESG rating disagreement for portfolio decisions and asset pricing. Rating disagreement leads to higher effective risk aversion, higher market premium, and lower demand for stocks. Disagreement also tilts the negative ESG-CAPM alpha relation and affects the systematic risk exposure of individual stocks. Combining ESG ratings from six major rating agencies, we provide supporting evidence for the model predictions. Our findings help reconcile the mixed evidence on the cross-sectional return predictability of ESG ratings and they suggest that the lack of consistency in ESG ratings could distort the risk-return trade-off.

Keywords: ESG, Rating Disagreement, Effective Risk Aversion, Portfolio Choice, Capital Asset Pricing Model

JEL Classification: G11, G12, G24, M14, Q01

Suggested Citation

Avramov, Doron and Cheng, Si and Lioui, Abraham and Tarelli, Andrea, Investment and Asset Pricing with ESG Disagreement (October 15, 2020). Available at SSRN: https://ssrn.com/abstract=3711218 or http://dx.doi.org/10.2139/ssrn.3711218

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Si Cheng (Contact Author)

Chinese University of Hong Kong - Department of Finance ( email )

12/F, Cheng Yu Tung Building
No.12, Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/cheng-si/

Abraham Lioui

EDHEC Business School and Scientific Beta Research Chair ( email )

France

Andrea Tarelli

Catholic University of Milan ( email )

Largo Gemelli, 1
Milan, 20123
Italy

HOME PAGE: http://sites.google.com/view/andreatarelli

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