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Who can better push firms to go "green"? A look at ESG effects on stock returns

Author

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  • Serge Darolles

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Gaëlle Le Fol

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Yuyi He

    (CUHK - The Chinese University of Hong Kong [Hong Kong])

Abstract

We examine how the information contained in corporate social performance isincorporated into stock prices. Pastor et al. (2021) propose an equilibrium modelfocusing exclusively on the demand part coming from investors (discount rate story).They show that brown assets should have higher expected returns than green assetsbecause investors have green tastes. In line with theoretical model of Pedersen etal. (2021), Derrien et al. (2022) analyze how the impact of negative ESG news onfirms' future value, focusing exclusively on the expectations of futures sales (cashflows story). To understand the net effect of ESG on stocks returns, we must reconcilethe two stories and analyze the perception of customers and investors' green realinvestment of firms and the effects of their actions and interactions. Neither theory,nor empirical studies give a clear conclusion on the sign of the effect because they onlylook at one channel at a time. We decompose here the effect of "S" scores on expectedreturns via changes in institutional ownership, and show that the negative effect candisappear when allowing for both the cash flows and the discount rate parts in theempirical model. Finally, we show that "E", "S", and "G" qualities are not perceivedthe same by customers and investors changing the overall effect on stocks returns.

Suggested Citation

  • Serge Darolles & Gaëlle Le Fol & Yuyi He, 2023. "Who can better push firms to go "green"? A look at ESG effects on stock returns," Post-Print hal-04462749, HAL.
    • Handle: RePEc:hal:journl:hal-04462749
    Note: View the original document on HAL open archive server: https://hal.science/hal-04462749
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    References listed on IDEAS

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