Working Paper: NBER ID: w28156
Authors: Jie Cao; Sheridan Titman; Xintong Zhan; Weiming Zhang
Abstract: 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.
Keywords: ESG; Institutional Trading; Stock Returns; Socially Responsible Investing
JEL Codes: G12; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| socially responsible institutional ownership (M14) | stock return patterns (G12) |
| limited attention from SR institutions (G29) | underreaction to mispricing signals (G41) |
| higher SR institutional ownership (G32) | larger price delay (D49) |
| ESG scores (controlled for SR ownership) (G32) | stock return patterns (G12) |
| SR ownership influences return patterns (C22) | funding constraints affect market behavior (E44) |