Investor Reliance on ESG Ratings and Stock Price Performance

75 Pages Posted: 10 Mar 2021 Last revised: 2 Aug 2022

See all articles by Aleksandra Rzeźnik

Aleksandra Rzeźnik

York University - Schulich School of Business

Kathleen Weiss Hanley

Lehigh University - College of Business

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: July 27, 2022

Abstract

We exploit a quasi-natural experiment, the recalibration of Sustainalytics’ environmental, social, and governance (ESG) rating methodology, to study the implications of investor reliance on ESG ratings on stock returns, absent any change in firms’ underlying ESG fundamentals. A one standard deviation decline in the change in ESG rating generates an abnormal monthly return of 1%. This effect is largely due to retail investors’ blind reliance on ratings, whose behavior exerts transitory price pressure. We do not find a similar effect on mutual fund investment behavior or investor flows but affected firms repurchase shares in response to the stock price decline.

Keywords: Corporate Social Responsibility, ESG Rating Agencies, Sustainable Invest- ments, Socially responsible investing, ESG, Portfolio choice

JEL Classification: G11, G12, G23, G59, M14, Q5

Suggested Citation

Rzeźnik, Aleksandra and Hanley, Kathleen Weiss and Pelizzon, Loriana, Investor Reliance on ESG Ratings and Stock Price Performance (July 27, 2022). SAFE Working Paper No. 310, Available at SSRN: https://ssrn.com/abstract=3801703 or http://dx.doi.org/10.2139/ssrn.3801703

Aleksandra Rzeźnik

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kathleen Weiss Hanley

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

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