Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/243279 
Year of Publication: 
2021
Series/Report no.: 
SAFE Working Paper No. 310
Version Description: 
September 23, 2021
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
We exploit a modification to Sustainalytics' environmental, social, and governance (ESG) rating methodology, which is subsequently adopted by Morningstar, to study whether ESG ratings are salient for stock pricing. We show that the inversion of the rating scale but not new information leads some investors to make incorrect assessments about the meaning of the change in ESG ratings. They buy (sell) stocks they misconceive as ESG upgraded (downgraded) even when the opposite is true. This trading behavior exerts transitory price pressure on a↵ected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.
Subjects: 
Corporate social responsibility
ESG rating agencies
sustainable investments
socially responsible investing
ESG
portfolio choice
JEL: 
G11
G12
G23
G59
M14
Q5
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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