The Salience of ESG Ratings for Stock Pricing: Evidence from (Potentially) Confused Investors

60 Pages Posted: 14 Jul 2021

See all articles by Loriana Pelizzon

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Aleksandra Rzeznik

York University

Kathleen Weiss Hanley

Lehigh University - College of Business

Date Written: July 2021

Abstract

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

Suggested Citation

Pelizzon, Loriana and Rzeznik, Aleksandra and Hanley, Kathleen Weiss, The Salience of ESG Ratings for Stock Pricing: Evidence from (Potentially) Confused Investors (July 2021). CEPR Discussion Paper No. DP16334, Available at SSRN: https://ssrn.com/abstract=3886820

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

Aleksandra Rzeznik

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kathleen Weiss Hanley

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

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