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ESG Preference, Institutional Trading, and Stock Return Patterns

Published online by Cambridge University Press:  12 August 2022

Jie Cao Open the ORCID record for Jie Cao [Opens in a new window] ,
Sheridan Titman Open the ORCID record for Sheridan Titman [Opens in a new window] ,
Xintong Zhan Open the ORCID record for Xintong Zhan [Opens in a new window]  and
Weiming Zhang
Jie Cao
Affiliation:
Hong Kong Polytechnic University School of Accounting and Finance jie.cao@polyu.edu.hk
Sheridan Titman
Affiliation:
University of Texas at Austin McCombs School of Business Sheridan.Titman@mccombs.utexas.edu
Xintong Zhan*
Affiliation:
Fudan University School of Management
Weiming Zhang
Affiliation:
IE Business School elaine.zhang@ie.edu
*
xintongzhan@fudan.edu.cn (corresponding author)
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Abstract

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Socially responsible (SR) institutions tend to focus more on the environmental, social, and governance (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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 5 , August 2023 , pp. 1843 - 1877
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Vikas Agrawal, Hendrik Bessembinder (the editor), 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, Haifeng You, and seminar participants at China Europe International Business School, Erasmus University Rotterdam, Fudan Univeristy, Hong Kong Polytechnic University, Korea University, NYU Stern, Michigan State University, Northeastern University, Peking University HSBC Business School, Schroders Systematic Investments, and Tsinghua University for helpful discussions and useful suggestions. We have benefited from the comments of participants at the 2020 Western Finance Association Annual Meeting, the 2019 Northern Finance Association Annual Conference, the 2019 China International Conference in Finance, the 2019 Finance Down Under Conference, the 2020 Fixed Income and Financial Institutions (FIFI) Conference, the 2019 Luxembourg Asset Management Summit, the 2020 FMA Consortium on Asset Management, the 2017 CQAsia-BoAML Conference, the 2018 Deutsche Bank Global Quantitative Strategy Conference, the 2018 INQUIRE Europe Autumn Seminar, the 2018 Geneva Summit on Sustainable Finance, and the 2019 Singapore Sustainable and Impact Investing Forum. 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 article was supported by a grant from the Research Grant Council of the Hong Kong Special Administrative Region, China (Project No. ECS 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. All errors are our own.

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