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

86 Pages Posted: 12 Apr 2021 Last revised: 1 May 2024

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ; National Bureau of Economic Research (NBER)

Alexandr Kopytov

University of Rochester - Simon Business School

Lin Shen

INSEAD

Haotian Xiang

Guanghua School of Management, Peking University

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2021

Abstract

We study how ESG investing reshapes information aggregation by prices. We document that the information content of asset prices changes with ESG investing. We then develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG performances of a firm but have different preferences about them. Two investor groups trade in opposite directions based on the same information, resulting in a potential multiplicity of equilibrium price. The growth of green investors and an improvement in ESG information quality can reduce price informativeness about a firm's financial performance and raise its cost of capital.

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 3, 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)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexandr Kopytov

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Lin Shen (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Haotian Xiang

Guanghua School of Management, Peking University ( email )

Beijing
China

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