ESG Divergence and the Market Environment

Abstract

We investigate whether differences in information among investors about the environmental, social, and governance quality of firms ("ESG divergence") impact the liquidity and volume of the firms' stocks. We find that, when ESG investors are more interested in a stock and overweight it in their portfolios, lower ESG divergence decreases spreads and increases volume, a finding that is in line with the implications of rational information asymmetry models. When ESG investors are less interested in a stock and underweight it, lower divergence means lower volume and larger spreads, consistent with predictions of differences of opinion models. The social dimension of ESG appears to be the main driver behind the relationships we uncover.

Keywords

Tags of Social Finance