IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v22y2021i2d10.1057_s41260-020-00203-z.html
   My bibliography  Save this article

Expected and realized returns on stocks with high- and low-ESG exposure

Author

Listed:
  • Olaf Stotz

    (Frankfurt School of Finance and Management)

Abstract

Empirically, stocks with a good environmental, social, or governance (ESG) rating tend to earn higher returns than stocks with a low rating. In contrast, the expected returns of high-ESG stocks are primarily lower than those of low-ESG stocks. The difference between realized and expected returns in the ESG domain constitutes a puzzle which we will address in this paper. Applying a return decomposition, we find that the puzzle can be explained by discount rate news. We find that discount rates of high-ESG stocks have fallen relative to low-ESG stocks. However, discount rate news does not reflect changes in risk; rather, discount rate news is systematically related to the demand of investors who have ESG preferences.

Suggested Citation

  • Olaf Stotz, 2021. "Expected and realized returns on stocks with high- and low-ESG exposure," Journal of Asset Management, Palgrave Macmillan, vol. 22(2), pages 133-150, March.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:2:d:10.1057_s41260-020-00203-z
    DOI: 10.1057/s41260-020-00203-z
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41260-020-00203-z
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/s41260-020-00203-z?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Li, Zhichuan & Minor, Dylan B. & Wang, Jun & Yu, Chong, 2019. "A learning curve of the market: Chasing alpha of socially responsible firms," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).
    2. Michael C. Jensen, 2010. "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 32-42, January.
    3. Christophe Revelli & Jean-Laurent Viviani, 2015. "Financial performance of socially responsible investing (SRI): what have we learned? A meta-analysis," Post-Print halshs-01141295, HAL.
    4. Sadok El Ghoul & Omrane Guedhami & Hakkon Kim & Kwangwoo Park, 2018. "Corporate Environmental Responsibility and the Cost of Capital: International Evidence," Journal of Business Ethics, Springer, vol. 149(2), pages 335-361, May.
    5. Arno Riedl & Paul Smeets, 2017. "Why Do Investors Hold Socially Responsible Mutual Funds?," Journal of Finance, American Finance Association, vol. 72(6), pages 2505-2550, December.
    6. John Y. Campbell & Christopher Polk & Tuomo Vuolteenaho, 2010. "Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 305-344, January.
    7. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
    8. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    9. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December.
    10. Rui Albuquerque & Yrjö Koskinen & Chendi Zhang, 2019. "Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence," Management Science, INFORMS, vol. 65(10), pages 4451-4469, October.
    11. James Claus & Jacob Thomas, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
    12. William R. Gebhardt & Charles M. C. Lee & Bhaskaran Swaminathan, 2001. "Toward an Implied Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 135-176, June.
    13. Michael Robinson & Anne Kleffner & Stephanie Bertels, 2011. "Signaling Sustainability Leadership: Empirical Evidence of the Value of DJSI Membership," Journal of Business Ethics, Springer, vol. 101(3), pages 493-505, July.
    14. Yuchao Xiao & Robert Faff & Philip Gharghori & Darren Lee, 2013. "An Empirical Study of the World Price of Sustainability," Journal of Business Ethics, Springer, vol. 114(2), pages 297-310, May.
    15. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    16. Fama, Eugene F. & French, Kenneth R., 2007. "Disagreement, tastes, and asset prices," Journal of Financial Economics, Elsevier, vol. 83(3), pages 667-689, March.
    17. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    18. Armstrong, J. Scott & Green, Kesten C., 2013. "Effects of corporate social responsibility and irresponsibility policies," Journal of Business Research, Elsevier, vol. 66(10), pages 1922-1927.
    19. repec:bla:jfinan:v:43:y:1988:i:3:p:661-76 is not listed on IDEAS
    20. Opp, Marcus & Oehmke, Martin, 2020. "A theory of socially responsible investment," CEPR Discussion Papers 14351, C.E.P.R. Discussion Papers.
    21. Botshekan, Mahmoud & Kraeussl, Roman & Lucas, Andre, 2012. "Cash Flow and Discount Rate Risk in Up and Down Markets: What Is Actually Priced?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(6), pages 1279-1301, December.
    22. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    23. Robert G. Eccles & Ioannis Ioannou & George Serafeim, 2014. "The Impact of Corporate Sustainability on Organizational Processes and Performance," Management Science, INFORMS, vol. 60(11), pages 2835-2857, November.
    24. Alan Gregory & Julie Whittaker, 2013. "Exploring the Valuation of Corporate Social Responsibility—A Comparison of Research Methods," Journal of Business Ethics, Springer, vol. 116(1), pages 1-20, August.
    25. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
    26. Bryan Hong & Zhichuan Li & Dylan Minor, 2016. "Corporate Governance and Executive Compensation for Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 136(1), pages 199-213, June.
    27. Long Chen & Xinlei Zhao, 2009. "Return Decomposition," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5213-5249, December.
    28. Alan Gregory & Rajesh Tharyan & Julie Whittaker, 2014. "Corporate Social Responsibility and Firm Value: Disaggregating the Effects on Cash Flow, Risk and Growth," Journal of Business Ethics, Springer, vol. 124(4), pages 633-657, November.
    29. Olivier David Zerbib, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Post-Print halshs-02008641, HAL.
    30. Yongtae Kim & Meir Statman, 2012. "Do Corporations Invest Enough in Environmental Responsibility?," Journal of Business Ethics, Springer, vol. 105(1), pages 115-129, January.
    31. Emiel Duuren & Auke Plantinga & Bert Scholtens, 2016. "ESG Integration and the Investment Management Process: Fundamental Investing Reinvented," Journal of Business Ethics, Springer, vol. 138(3), pages 525-533, October.
    32. Zerbib, Olivier David, 2019. "The effect of pro-environmental preferences on bond prices: Evidence from green bonds," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 39-60.
    33. Jaepil Choi & Heli Wang, 2009. "Stakeholder relations and the persistence of corporate financial performance," Strategic Management Journal, Wiley Blackwell, vol. 30(8), pages 895-907, August.
    34. Darwin Choi & Zhenyu Gao & Wenxi Jiang, 2020. "Attention to Global Warming," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1112-1145.
    35. Kacperczyk, Marcin & Bolton, Patrick, 2020. "Carbon Premium around the World," CEPR Discussion Papers 14567, C.E.P.R. Discussion Papers.
    36. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    37. Luo, H. Arthur & Balvers, Ronald J., 2017. "Social Screens and Systematic Investor Boycott Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 365-399, February.
    38. Galema, Rients & Plantinga, Auke & Scholtens, Bert, 2008. "The stocks at stake: Return and risk in socially responsible investment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2646-2654, December.
    39. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    40. Janusz Brzeszczyński & Graham McIntosh, 2014. "Performance of Portfolios Composed of British SRI Stocks," Journal of Business Ethics, Springer, vol. 120(3), pages 335-362, March.
    41. Long Chen & Zhi Da & Xinlei Zhao, 2013. "What Drives Stock Price Movements?," The Review of Financial Studies, Society for Financial Studies, vol. 26(4), pages 841-876.
    42. Kempf, Alexander & Osthoff, Peer, 2007. "The effect of socially responsible investing on portfolio performance," CFR Working Papers 06-10, University of Cologne, Centre for Financial Research (CFR).
    43. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    44. Yue Tang & Jin (Ginger) Wu & Lu Zhang, 2014. "Do Anomalies Exist Ex Ante?," Review of Finance, European Finance Association, vol. 18(3), pages 843-875.
    45. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    46. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    47. Olivier David Zerbib, 2020. "A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion," Working Papers hal-02570021, HAL.
    48. Alexander Kempf & Peer Osthoff, 2007. "The Effect of Socially Responsible Investing on Portfolio Performance," European Financial Management, European Financial Management Association, vol. 13(5), pages 908-922, November.
    49. Paul C. Godfrey & Craig B. Merrill & Jared M. Hansen, 2009. "The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis," Strategic Management Journal, Wiley Blackwell, vol. 30(4), pages 425-445, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gil Cohen, 2023. "The impact of ESG risks on corporate value," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1451-1468, May.
    2. Donnelly, David & Fricaudet, Marie & Ameli, Nadia, 2023. "“Accelerating institutional funding of low-carbon investment: The potential for an investment emissions intensity tax”," Ecological Economics, Elsevier, vol. 207(C).
    3. Jonas Zink, 2024. "Which investors support the transition toward a low-carbon economy? Exit and Voice in mutual funds," Journal of Asset Management, Palgrave Macmillan, vol. 25(2), pages 147-161, March.
    4. Christina E. Bannier & Yannik Bofinger & Björn Rock, 2023. "The risk-return tradeoff: are sustainable investors compensated adequately?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 165-172, May.
    5. Thomas Cauthorn & Christian Klein & Leonard Remme & Bernhard Zwergel, 2023. "Portfolio benefits of taxonomy orientated and renewable European electric utilities," Journal of Asset Management, Palgrave Macmillan, vol. 24(7), pages 558-571, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    2. Ciciretti, Rocco & Dalò, Ambrogio & Dam, Lammertjan, 2023. "The contributions of betas versus characteristics to the ESG premium," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 104-124.
    3. Venturini, Alessio, 2022. "Climate change, risk factors and stock returns: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 79(C).
    4. Liu, Xufeng & Wan, Die, 2023. "Retail investor trading and ESG pricing in China," Research in International Business and Finance, Elsevier, vol. 65(C).
    5. Benjamin Lynch & Martha O'Hagan‐Luff, 2024. "Relative corporate social performance and cost of equity capital: International evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2882-2910, July.
    6. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2022. "Dissecting green returns," Journal of Financial Economics, Elsevier, vol. 146(2), pages 403-424.
    7. Becchetti, Leonardo & Ciciretti, Rocco & Dalò, Ambrogio, 2018. "Fishing the Corporate Social Responsibility risk factors," Journal of Financial Stability, Elsevier, vol. 37(C), pages 25-48.
    8. Maretno A. Harjoto & Andreas G. F. Hoepner & Marcus A. Nilsson, 2022. "Bondholders’ returns and stakeholders’ interests," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1271-1301, November.
    9. Lars Hornuf & Gül Yüksel, 2022. "The Performance of Socially Responsible Investments: A Meta-Analysis," CESifo Working Paper Series 9724, CESifo.
    10. Ramelli, Stefano & Ossola, Elisa & Rancan, Michela, 2021. "Stock price effects of climate activism: Evidence from the first Global Climate Strike," Journal of Corporate Finance, Elsevier, vol. 69(C).
    11. Kaserer Christoph & Hanauer Matthias X., 2017. "25 Jahre Fama-French-Modell: Erklärungsgehalt, Anomalien und praktische Implikationen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 18(2), pages 98-116, June.
    12. Federica Ielasi & Paolo Ceccherini & Pietro Zito, 2020. "Integrating ESG Analysis into Smart Beta Strategies," Sustainability, MDPI, vol. 12(22), pages 1-22, November.
    13. Ramelli, Stefano & Ossola, Elisa & Rancan, Michela, 2020. "Climate Sin Stocks: Stock Price Reactions to Global Climate Strikes," Working Papers 2020-03, Joint Research Centre, European Commission.
    14. Cauthorn, Thomas & Dumrose, Maurice & Eckert, Julia & Klein, Christian & Zwergel, Bernhard, 2023. "Rating changes revisited: New evidence on short-term ESG momentum," Finance Research Letters, Elsevier, vol. 54(C).
    15. Bannier, Christina E. & Bofinger, Yannik & Rock, Björn, 2019. "Doing safe by doing good: ESG investing and corporate social responsibility in the U.S. and Europe," CFS Working Paper Series 621, Center for Financial Studies (CFS).
    16. Patrícia Pereira & Maria Céu Cortez & Florinda Silva, 2019. "Socially responsible investing and the performance of Eurozone corporate bond portfolios," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 26(6), pages 1407-1422, November.
    17. David Gilchrist & Jing Yu & Rui Zhong, 2021. "The Limits of Green Finance: A Survey of Literature in the Context of Green Bonds and Green Loans," Sustainability, MDPI, vol. 13(2), pages 1-12, January.
    18. Guillermo Badía & Maria C. Cortez & Luis Ferruz, 2020. "Socially responsible investing worldwide: Do markets value corporate social responsibility?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(6), pages 2751-2764, November.
    19. Lestari, Jenjang Sri & Frömmel, Michael, 2024. "Socially responsible investments: doing good while doing well in developed versus emerging markets?," Research in International Business and Finance, Elsevier, vol. 69(C).
    20. Alice Monti & Pierpaolo Pattitoni & Barbara Petracci & Otto Randl, 2022. "Does corporate social responsibility impact equity risk? International evidence," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 825-855, October.

    More about this item

    Keywords

    Expected returns; Realized returns; Cash-flow news; Discount rate news; ESG; Sustainable investing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:22:y:2021:i:2:d:10.1057_s41260-020-00203-z. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.