Retail Investors and ESG News

59 Pages Posted: 15 Mar 2023 Last revised: 10 Feb 2024

See all articles by Qianqian Li

Qianqian Li

Stanford University, Graduate School of Business, Students

Edward M. Watts

Yale School of Management

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: February 6, 2024

Abstract

An important debate exists around the extent to which retail investors make sustainable investments and, if they do, why. We contribute to this debate by investigating the aggregate trading patterns of retail investors around a comprehensive sample of key environmental, social, and governance (ESG) news events for U.S. firms. We show that ESG news events appear to be an important factor in retail investors' portfolio allocation decisions. Yet, inconsistent with arguments about retail investors' nonpecuniary preferences, our evidence shows that retail investors mainly trade on this information when they deem it financially material to a company's stock performance. We also find their net trading demand predicts abnormal returns in the subsample of financially material events, consistent with retail traders benefiting from incorporating ESG-related information into their decision-making when it influences firm value. Overall we conclude that the average U.S. retail investor cares about firms' ESG activities but primarily to the extent these activities matter for company financial performance.

Keywords: Retail Investors; Individual Investors; Environmental, Social and Governance (ESG); Socially Responsible Investing (SRI)

JEL Classification: G12, G14, G20, M14, G24, J32

Suggested Citation

Li, Qianqian and Watts, Edward and Zhu, Christina, Retail Investors and ESG News (February 6, 2024). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=4384675 or http://dx.doi.org/10.2139/ssrn.4384675

Qianqian Li

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

Edward Watts

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Christina Zhu (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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