Does Sustainable Investing Dull Stock Reactions to Cash Flow News? 

Abstract

The growing importance of sustainability criteria for investment decisions suggests that cash-flow news may become less significant in determining stock prices. We examine this proposition through earnings announcements, showing that stocks owned by sustainable investors are 45%-58% less sensitive to earnings news. This reduced sensitivity is accompanied by lower trading volume and persists post-announcement, indicating a lasting impact on price formation rather than temporary mispricing. We investigate the reasons behind the weaker earnings response and find that it cannot be explained by differences in earnings news content, market anticipation, or ownership by other investor types. Calibrating a flexible present value framework reveals that lower earnings persistence in high-sustainable-ownership stocks accounts for a large part of the effect. However, our analysis also implies a 1%-3% reduced discount rate for stocks with high sustainable ownership in order to fully align the model-implied price response with the observed data.

Keywords: Sustainable Investing, Institutional Investors, Earnings Announcements. JEL codes: G11, G12, G14, G23

JEL Classification: G11, G12, G14, G23.