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Corporate ESG Scores and Equity Market Misvaluation: Toward Ethical Investor Behavior

Author

Listed:
  • Z. Barka
  • Taher Hamza

    (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie)

  • S. Mrad

Abstract

Corporate sustainability is of paramount importance in today's business landscape. Previous works have shown that ESG practices contribute to increase firm long-run value. However, whether and how equity market values corporate sustainability remains little explored. In this paper, we investigate the impact of corporate ESG scores on equity market misvaluation. Using data from 221 French listed firms over 2002\textendash2021, our main findings show that ESG scores increase equity misvaluation by exacerbating (mitigating) equity overvaluation (undervaluation). This effect holds even in times of crisis and is more pronounced for firms with low analyst coverage. Furthermore, we find that firms with moderate ESG scores exhibit positive abnormal returns. Overall, our empirical results suggest that sustainable activities are associated with a ``halo effect'', enhancing firm reputation and investor perception. This positive perception promotes ethical investing behavior and then assigns value to high ESG rating company. \textcopyright 2023

Suggested Citation

  • Z. Barka & Taher Hamza & S. Mrad, 2023. "Corporate ESG Scores and Equity Market Misvaluation: Toward Ethical Investor Behavior," Post-Print hal-04435551, HAL.
    • Handle: RePEc:hal:journl:hal-04435551
    DOI: 10.1016/j.econmod.2023.106467
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    Cited by:

    1. Tian, Lichuan & Sun, Kai & Yang, Jie & Zhao, Yang, 2024. "Does digital economy affect corporate ESG performance? New insights from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 964-980.
    2. Rahat, Birjees & Nguyen, Pascal, 2024. "The impact of ESG profile on Firm's valuation in emerging markets," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    3. Liang, Jinma & Zhang, Yicheng & Li, Yuanheng, 2024. "The role of ESG scores in ESG fund performance and institutional investor selection," Finance Research Letters, Elsevier, vol. 65(C).

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