Working Paper: NBER ID: w29839
Authors: Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
Abstract: We study how environmental, social and governance (ESG) investing reshapes information aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG risks but have different preferences over them. Because of the preference heterogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the financial payoff and raise the cost of capital.
Keywords: ESG investing; Heterogeneous preferences; Information aggregation; Asset prices
JEL Codes: G14; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the fraction of green investors (F64) | reduction in price informativeness about the financial payoff (G19) |
| balance of investor base (G23) | higher cost of capital (G31) |
| dominance of one investor group (G34) | decrease in cost of capital (G31) |
| trading behavior of green investors (G41) | affects informational content of price for traditional investors (G14) |
| changes in investor composition (G24) | affect market dynamics (D49) |