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Investor sentiment and the time-varying sustainability premium

Author

Listed:
  • Vitor Azevedo

    (Technical University of Munich)

  • Christoph Kaserer

    (Technical University of Munich)

  • Lucila M. S. Campos

    (Universidade Federal de Santa Catarina)

Abstract

Studies show the inconclusive results regarding the relation between corporate social and environmental responsibility (CSR and CER) and expected returns. We argue that the reason for these mixed results is that the sustainability premium (i.e., the return difference of high-intensity minus low-intensity CSR/CER firms) is time-varying and correlated with investor sentiment. We find that high-intensity CSR (CER) firms have a monthly excess return that is 0.70 (0.88) p.p. higher following periods of low investor sentiment as compared to periods of high sentiment. Given that standard pricing factors cannot fully explain the abnormal returns caused by investor sentiment on the sustainability premium, we propose a sustainability pricing factor, estimated as the second principal component of portfolios sorted based on environmental and social variables, which corrects this mispricing.

Suggested Citation

  • Vitor Azevedo & Christoph Kaserer & Lucila M. S. Campos, 2021. "Investor sentiment and the time-varying sustainability premium," Journal of Asset Management, Palgrave Macmillan, vol. 22(7), pages 600-621, December.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:7:d:10.1057_s41260-021-00233-1
    DOI: 10.1057/s41260-021-00233-1
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    1. Nagamani Subramanian & M. Suresh, 2022. "Social Sustainability Factors Influencing the Implementation of Sustainable HRM in Manufacturing SMEs," Humanistic Management Journal, Springer, vol. 7(3), pages 469-507, December.

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    More about this item

    Keywords

    Sustainability; Corporate social responsibility; Corporate environmental responsibility; Expected returns; Financial performance; Investor sentiment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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