Hostname: page-component-7b7567c8c-fvjsw Total loading time: 0 Render date: 2026-11-12T21:51:40.306Z Has data issue: false hasContentIssue false
  • English
  • Français

ESG Preference, Institutional Trading, and Stock Return Patterns

Published online by Cambridge University Press:  12 August 2022

Jie CaoOpen the ORCID record for Jie Cao[Opens in a new window],
Sheridan TitmanOpen the ORCID record for Sheridan Titman[Opens in a new window],
Xintong ZhanOpen 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)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

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.

Information

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.

References

Adrian, T.; Etula, E.; and Muir, T.. “Financial Intermediaries and the Cross-Section of Asset Returns.” Journal of Finance, 69 (2014), 2557–2596.10.1111/jofi.12189CrossRefGoogle Scholar
Akbas, F.; Armstrong, W. J.; Sorescu, S.; and Subrahmanyam, A.. “Smart Money, Dumb Money, and Capital Market Anomalies.” Journal of Financial Economics, 118 (2015), 355–382.10.1016/j.jfineco.2015.07.003CrossRefGoogle Scholar
Akbas, F.; Armstrong, W. J.; Sorescu, S.; and Subrahmanyam, A.. “Capital Market Efficiency and Arbitrage Efficacy.” Journal of Financial and Quantitative Analysis, 51 (2016), 387–413.10.1017/S0022109016000223CrossRefGoogle Scholar
Almazan, A.; Brown, K. C.; Carlson, M.; and Chapman, D. A.. “Why Constrain Your Mutual Fund Manager?” Journal of Financial Economics, 73 (2004), 289–321.10.1016/j.jfineco.2003.05.007CrossRefGoogle Scholar
Amihud, Y., and Goyenko, R.. “Mutual Fund’s R 2 as Predictor of Performance.” Review of Financial Studies, 26 (2013), 667–694.10.1093/rfs/hhs182CrossRefGoogle Scholar
Ang, A.; Hodrick, R. J.; Xing, Y.; and Zhang, X.. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006), 259–299.10.1111/j.1540-6261.2006.00836.xCrossRefGoogle Scholar
Ben-Rephael, A.; Da, Z.; and Israelsen, R. D.. “It Depends on Where You Search: Institutional Investor Attention and Underreaction To News.” Review of Financial Studies, 30 (2017), 3009–3047.10.1093/rfs/hhx031CrossRefGoogle Scholar
Bernard, V. L., and Thomas, J. K.. “Post-Earnings-Announcement Drift: Delayed Price Response or Characteristic Premium?” Journal of Accounting Research, 27 (1989), 1–36.10.2307/2491062CrossRefGoogle Scholar
Brunnermeier, M. K., and Pedersen, L. H.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies, 22 (2009), 2201–2238.10.1093/rfs/hhn098CrossRefGoogle Scholar
Bushee, B. J. “Do Institutional Investors Prefer Near-Term Earnings Over Long-Run Value?” Contemporary Accounting Research, 18 (2001), 207–246.10.1506/J4GU-BHWH-8HME-LE0XCrossRefGoogle Scholar
Cao, J.; Han, B.; and Wang, Q.. “Institutional Investment Constraints and Stock Prices.” Journal of Financial and Quantitative Analysis, 52 (2017), 465–489.10.1017/S0022109017000102CrossRefGoogle Scholar
Cao, J.; Liang, H.; and Zhan, X.. “Peer Effects of Corporate Social Responsibility.” Management Science, 65 (2019), 5487–5503.10.1287/mnsc.2018.3100CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.10.1111/j.1540-6261.1997.tb03808.xCrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?” Journal of Accounting and Economics, 58 (2014), 41–58.10.1016/j.jacceco.2014.06.001CrossRefGoogle Scholar
Çötelioğlu, E.; Franzoni, F.; and Plazzi, A.. “What Constrains Liquidity Provision? Evidence from Institutional Trades.” Review of Finance, 25 (2021), 485–517.10.1093/rof/rfaa016CrossRefGoogle Scholar
Deng, X.; Kang, J.; and Low, B. S.. “Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers.” Journal of Financial Economics, 110 (2013), 87–109.10.1016/j.jfineco.2013.04.014CrossRefGoogle Scholar
Edelen, R. M.; Ince, O. S.; and Kadlec, G. B.. “Institutional Investors and Stock Return Anomalies.” Journal of Financial Economics, 119 (2016), 472–488.10.1016/j.jfineco.2016.01.002CrossRefGoogle Scholar
Edmans, A. “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics, 101 (2011), 621–640.10.1016/j.jfineco.2011.03.021CrossRefGoogle Scholar
Engelberg, J, E.; Reed, A. V.; and Ringgenberg, M. C.. “Short-Selling Risk.” Journal of Finance, 73 (2018), 755–786.10.1111/jofi.12601CrossRefGoogle Scholar
Evans, R.; Ferreira, M. A.; and Prado, M. P.. “Fund Performance and Equity Lending: Why Lend What You Can Sell?” Review of Finance, 21 (2017), 1093–1121.10.1093/rof/rfw059CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.10.1111/j.1540-6261.1992.tb04398.xCrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.10.1016/0304-405X(93)90023-5CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Disagreement, Tastes, and Asset Prices.” Journal of Financial Economics, 83 (2007), 667–689.10.1016/j.jfineco.2006.01.003CrossRefGoogle Scholar
Flammer, C. “Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach.” Management Science, 61 (2015), 2549–2568.10.1287/mnsc.2014.2038CrossRefGoogle Scholar
Foster, G.; Olsen, C.; and Shevlin, T.. “Earnings Releases, Anomalies, and the Behavior of Security Returns.” Accounting Review, 59 (1984), 574–603.Google Scholar
Garleanu, N., and Pedersen, L. H.. “Margin-Based Asset Pricing and Deviations from the Law of One Price.” Review of Financial Studies, 24 (2011), 1980–2022.10.1093/rfs/hhr027CrossRefGoogle Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.10.1016/j.jfineco.2004.10.002CrossRefGoogle Scholar
Gibson, R.; Krüger, P.; and Schmidt, P. S.. “ESG Rating Disagreement and Stock Returns.” Financial Analysts Journal, 77 (2021), 104–127.10.1080/0015198X.2021.1963186CrossRefGoogle Scholar
Gromb, D., and Vayanos, D.. “Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs.” Journal of Financial Economics, 66 (2002), 361–407.10.1016/S0304-405X(02)00228-3CrossRefGoogle Scholar
Gromb, D., and Vayanos, D.. “The Dynamics of Financially Constrained Arbitrage.” Journal of Finance, 73 (2018), 1713–1750.10.1111/jofi.12689CrossRefGoogle Scholar
Hartzmark, S. M., and Sussman, A.. “Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows.” Journal of Finance, 74 (2019), 2789–2837.10.1111/jofi.12841CrossRefGoogle Scholar
Heinkel, R.; Kraus, A.; and Zechner, J.. “The Effect of Green Investment on Corporate Behavior.” Journal of Financial and Quantitative Analysis, 36 (2001), 431–449.10.2307/2676219CrossRefGoogle Scholar
Hirshleifer, D.; Lim, S. S.; and Teoh, S. H.. “Driven to Distraction: Extraneous Events and Underreaction to Earnings News.” Journal of Finance, 64 (2009), 2289–2325.10.1111/j.1540-6261.2009.01501.xCrossRefGoogle Scholar
Hoepner, A. G. F.; Oikonomou, I.; Sautner, Z.; Starks, L. T.; and Zhou, X.. “ESG Shareholder Engagement and Downside Risk.” European Corporate Governance Institute – Finance Working Paper No. 671/2020 (2022).Google Scholar
Hong, H., and Kacperczyk, M.. “The Price of Sin: The Effects of Social Norms on Markets.” Journal of Financial Economics, 93 (2009), 15–36.CrossRefGoogle Scholar
Hou, K., and Moskowitz, T. J.. “Market Frictions, Price Delay, and the Cross-Section of Expected Returns.” Review of Financial Studies, 18 (2005), 981–1020.10.1093/rfs/hhi023CrossRefGoogle Scholar
Hwang, C. Y.; Titman, S.; and Wang, Y.. “Investor Tastes, Corporate Behavior, and Stock Returns: An Analysis of Corporate Social Responsibility.” Management Science, forthcoming (2022).10.1287/mnsc.2021.4179CrossRefGoogle Scholar
Khan, M.; Kogan, L.; and Serafeim, G.. “Mutual Fund Trading Pressure: Firm-Level Stock Price Impact and Timing of SEOs.” Journal of Finance, 67 (2012), 1371–1395.CrossRefGoogle Scholar
Krüger, P. “Corporate Goodness and Shareholder Wealth.” Journal of Financial Economics, 115 (2015), 304–329.10.1016/j.jfineco.2014.09.008CrossRefGoogle Scholar
Lewellen, J. “Institutional Investors and the Limits of Arbitrage.” Journal of Financial Economics, 102 (2011), 62–80.10.1016/j.jfineco.2011.05.012CrossRefGoogle Scholar
Lins, K. V.; Servaes, H.; and Tamayo, A.. “Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility During the Financial Crisis.” Journal of Finance, 72 (2017), 1785–1824.CrossRefGoogle Scholar
Ljungqvist, A., and Qian, W.. “How Constraining are Limits to Arbitrage?” Review of Financial Studies, 29 (2016), 1975–2028.10.1093/rfs/hhw028CrossRefGoogle Scholar
McLean, D., and Pontiff, J.. “Does Academic Publication Destroy Stock Return Predictability?” Journal of Finance, 71 (2016), 5–32.10.1111/jofi.12365CrossRefGoogle Scholar
Nagel, S. “Short Sales, Institutional Investors, and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.10.1016/j.jfineco.2004.08.008CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pastor, L.; Stambaugh, R. F.; and Taylor, L. A.. “Sustainable Investing in Equilibrium.” Journal of Financial Economics, 142 (2021), 550–571.10.1016/j.jfineco.2020.12.011CrossRefGoogle Scholar
Pedersen, L. H.; Fitzgibbons, S.; and Pomorski, L.. “Responsible Investing: The ESG-Efficient Frontier.” Journal of Financial Economics, 142 (2021), 572–597.10.1016/j.jfineco.2020.11.001CrossRefGoogle Scholar
Ridel, A., and Smeets, P.. “Why Do Investors Hold Socially Responsible Mutual Funds?” Journal of Finance, 72 (2017), 2505–2550.10.1111/jofi.12547CrossRefGoogle Scholar
Schmidt, D. “Distracted Institutional Investors.” Journal of Financial and Quantitative Analysis, 54 (2019), 2453–2491.10.1017/S0022109018001242CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “The Limits of Arbitrage.” Journal of Finance, 52 (1997), 35–55.10.1111/j.1540-6261.1997.tb03807.xCrossRefGoogle Scholar
Sias, R. W.; Starks, L. T.; and Titman, S.. “Changes in Institutional Ownership and Stock Returns: Assessment and Methodology.” Journal of Business, 79 (2006), 2869–2910.10.1086/508002CrossRefGoogle Scholar
Stambaugh, R. F.; Yu, J.; and Yuan, Y.. “Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle.” Journal of Finance, 70 (2015), 1903–1948.CrossRefGoogle Scholar
Starks, L.; Venkat, P.; and Zhu, Q.. “Corporate ESG Profiles and Investor Horizons.” Working Paper, University of Texas at Austin, University of Alabama, and Nanyang Technological University (2020).Google Scholar
Supplementary material: PDF

Cao et al. supplementary material

Appendix

Download Cao et al. supplementary material(PDF)
PDF 459.9 KB