PT  - JOURNAL ARTICLE
AU  - Christian Walkshäusl
TI  - Dissecting the Performance of Socially Responsible Firms
AID  - 10.3905/joi.2018.27.2.029
DP  - 2018 May 31
TA  - The Journal of Investing
PG  - 29--40
VI  - 27
IP  - 2
4099  - https://pm-research.com/content/27/2/29.short
4100  - https://pm-research.com/content/27/2/29.full
AB  - High-rated ESG (environmental, social, governance) firms do not outperform low-rated ESG firms in international markets. However, ESG-rated firms in general outperform unrated firms after controlling for firm size, book-to-market ratio, momentum, operating profitability, and investment. The following explanations are provided for these observations. First, though higher ESG ratings predict higher operating profitability and lower investments, these positive return-generating firm characteristics are not priced within the universe of ESG-rated firms, causing the insignificant return difference between high-rated and low-rated ESG firms. Second, the positive excess returns of ESG-rated firms over unrated firms reflect price corrections arising from the reversal of investors’ expectation errors concerning the impact of ESG characteristics on the firm’s future fundamental performance and are therefore the outcome of mispricing.TOPICS: Security analysis and valuation, ESG investing