The Salience of ESG Ratings for Stock Pricing: Evidence from (Potentially) Confused Investors
60 Pages Posted: 14 Jul 2021
Date Written: July 2021
We exploit the a modification to Sustainanlytics' environmental, social, and governance (ESG) rating methodology, which is subsequently adopted by Morningstar, to study whether ESG ratings are salient for stock pricing. We show that the inversion of the rating scale but not new information leads some investors to make incorrect assessments about the meaning of the change in ESG ratings. They buy (sell) stocks they misconceive as ESG upgraded (downgraded) even when the opposite is true. This trading behavior exerts transitory price pressure on affected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.
JEL Classification: G11, G12, G23, G59, M14, Q5
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