On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices

67 Pages Posted: 12 Apr 2021

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Alexandr Kopytov

The University of Hong Kong - Faculty of Business and Economics

Lin Shen

INSEAD

Haotian Xiang

Peking University - Department of Finance

Date Written: April 9, 2021

Abstract

We study how environmental, social and governance (ESG) investing reshapes information aggregation and price formation. We develop a rational expectations equilibrium model in which traditional and green investors are informed about monetary and non-monetary risks but have distinct preferences over them. Because of the preference heterogeneity, traditional and green investors trade in opposite directions based on the same information and make the price noisier to each other. We show that an increase in the share of green investors and an improvement in the quality of non-monetary information can reduce overall price informativeness and increase firm's cost of capital. Our analyses provide a rich set of testable implications.

Keywords: ESG investing, heterogeneous preferences, price informativeness

JEL Classification: G12, G14

Suggested Citation

Goldstein, Itay and Kopytov, Alexandr and Shen, Lin and Xiang, Haotian, On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices (April 9, 2021). Available at SSRN: https://ssrn.com/abstract=3823042 or http://dx.doi.org/10.2139/ssrn.3823042

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

Alexandr Kopytov

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lin Shen (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Haotian Xiang

Peking University - Department of Finance ( email )

Beijing
China

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