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Unraveling ESG Ambiguity, Price Reaction, and Trading Volume

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  • Jin, Yurong
  • Yan, Jingzhou
  • Yan, Qianhui

Abstract

We introduce an asset pricing model that integrates investors’ ESG preferences and their ambiguous attitudes towards firms’ ESG performance, influenced by inconsistent ESG ratings from diverse rating agencies. Our model, considering unregulated ESG reporting and variations in agency assessments, reveals significant dynamics in asset pricing. We discover that stronger belief in high ESG scores among investors increases asset holdings and prices, whereas increased perceived ESG ambiguity negatively impacts these metrics. Crucially, the model demonstrates that the ESG ambiguity attitudes parameter and the degree of perceived ESG ambiguity are inversely related to asset prices. Specifically, we find that heightened perceived ESG ambiguity and a higher ESG ambiguity attitudes parameter are associated with lower asset prices, reflecting in increased trading volumes and widened price differentials. This research offers vital insights into how investors’ preferences and perceptions about ESG influence asset pricing.

Suggested Citation

  • Jin, Yurong & Yan, Jingzhou & Yan, Qianhui, 2024. "Unraveling ESG Ambiguity, Price Reaction, and Trading Volume," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000023
    DOI: 10.1016/j.frl.2024.104972
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    Cited by:

    1. Sandra Chrzan & Christiane Pott, 2024. "Limiting environmental reporting flexibility: investor judgment based on the EU taxonomy," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1511-1548, November.
    2. Deng, Guoying & Ma, Shibo & Yan, Jingzhou & Shuai, Can & Liu, Hanying, 2024. "Dissecting the impact of the three E, S, G pillars on credit risk," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 301-313.
    3. Jin, Yurong & Yan, Jingzhou, 2024. "Sustainable investing with ESG ambiguous information," Economics Letters, Elsevier, vol. 241(C).

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    More about this item

    Keywords

    Asset pricing; ESG ambiguity; Price reaction; Sustainable investment; Trading volume;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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