ESG Preference, Institutional Trading, and Stock Return Patterns
Socially responsible (SR) institutions tend to focus more on the ESG performance and less on quantitative signals of value. Consistent with this difference in focus, we find that SR institutions react less to quantitative mispricing signals. Our evidence suggests that the increased focus on ESG may have influenced stock return patterns. Specifically, abnormal returns associated with these mispricing signals are greater for stocks held more by SR institutions. The link between SR ownership and the efficacy of mispricing signals only emerges in recent years with the rise of ESG investing, and is significant only when there are arbitrage-related funding constraints.
We thank Vikas Agrawal, Hendrik Bessembinder, Jennifer Carpenter, Tarun Chordia, Zhi Da, Amit Goyal, Charlie Hadlock, Bing Han, Samuel Hartzmark, Kewei Hou, Ozgur Ince (discussant), Hao Jiang, Kose John, Lars Kaiser, Ralph Koijen, Jeffrey Pontiff, Adam Reed (discussant), Luke Taylor (discussant), Patrick Verwijmeren, Neng Wang, Robert Whitelaw, David Yermack, and seminar participants at Erasmus University Rotterdam, Hong Kong Polytechnic University, Korea University, NYU Stern, Michigan State University, Northeastern University, Schroders Systematic Investments, and Tsinghua University for helpful discussions and useful suggestions. We have benefited from the comments of participants at Western Finance Association Annual Meeting, Northern Finance Association Annual Conference, China International Conference in Finance, Finance Down Under Conference, Fixed Income and Financial Institutions (FIFI) Conference, Luxembourg Asset Management Summit, FMA Consortium on Asset Management, CQAsia-BoAML Conference, Deutsche Bank Global Quantitative Strategy Conference, INQUIRE Europe Autumn Seminar, and Geneva Summit on Sustainable Finance. We acknowledge the best paper award at 2020 FMA Consortium on Asset Management, and the 2019 AAM-CAMRI Prize in Asset Management. The work described in this paper was supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China (Project No. CUHK 24501519), the 2019 Alternative Risk Premia Research Grant of the Paris-Dauphine House of Finance and Unigestion, and a grant from Geneva Institute for Wealth Management. A previous version was circulated under the title “ESG Preference and Market Efficiency: Evidence from Mispricing and Institutional Trading”. All errors are our own. Sheridan Titman acknowledges that he has had consulting arrangements with institutions -that use some of the strategies described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.