Value versus Values: The Effect of Stock Liquidity Shocks on Corporate Environmental Policies

Abstract

One fundamental challenge to the literature of sustainable investing is to disentangle value from values (Starks 2023). While values investors are willing to sacrifice financial returns to prioritize nonpecuniary objectives, value investors concern about whether environmental issues drive firm value, that is, improve the firm's risk-return prospects. By leveraging an exogenous liquidity shock, the tick size pilot (TSP) program, that disproportionately affects the financial prospects of value investors vis-à-vis values investors in the treated firms, we show that value investors play a significant role in driving environmental policies. During the TSP, treatment firms show a decline in their environmental rating. Green institutional investors divest in response to portfolio firms' environmental incidents. Such divesting intensity becomes less pronounced for treatment firms after TSP increases the transaction costs for treatment firms. The TSP-induced decline in environmental ratings is larger for firms with an ex-ante greater exposure to exit threats.

Keywords: Stock liquidity, Environment, Institutional investors, Divest, Voice, Value versus Values

JEL Classification: G1, G2, G3, Q5