Sustainable but Uncertain: How Investor Sentiment Shapes Stock Returns Across Different‐Sized Firms in an Emerging Economy

Zhu Naiping, Richard Wiredu, Timothy Masuni Nagriwum and Abigail Asare

Review of Development Economics, 2026, vol. 30, issue 4, 2697-2726

Abstract: This study examines how investor sentiment affects the relationship between sustainability uncertainty and stock returns across different firm sizes in China's emerging market. Using a 21‐year panel of 2310 Chinese‐listed firms, we show that investor sentiment is a pivotal channel through which sustainability uncertainty is priced. Higher ESG‐based uncertainty (ESGUI) depresses monthly returns, but the effect is fully mediated by sentiment for small‐caps and only partially for mid‐ and large‐caps. In bullish markets, sentiment amplifies the discount, whereas in bearish regimes it cushions the fall. Large‐cap stocks suffer the steepest penalty because ESG‐screened institutions re‐balance at the first hint of ambiguity, while small‐caps can even gain as retail investors treat uncertainty as a growth option. Robustness is confirmed with an alternative Baker‐Wurgler index, 1000‐bootstrap errors, and regime‐split estimations. The findings imply that regulators can curb volatility by tightening ESG disclosure, and investors should size‐tilt portfolios according to sentiment‐driven sustainability risk rather than fundamentals alone.

Date: 2026
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