Do Investors exaggerate corporate ESG information? Evidence of the ESG momentum effect in the Taiwanese market

Hong-Yi Chen and Sharon S. Yang

Pacific-Basin Finance Journal, 2020, vol. 63, issue C

Abstract: As environmental, social, and governance (ESG) factors become increasingly important in the business sector, investors pay more attention to corporate ESG information. Integrating ESG factors into the investment process has transformed from a niche to mainstream activity. This study demonstrates that investors systematically exaggerate corporate ESG information, leading to ESG momentum effects in financial markets. Specifically, investors exhibit optimistic responses to good news about companies with higher ESG scores but pessimistic responses to bad news about companies with lower ESG scores. Consistent with the overreaction hypothesis, the empirical results show that an ESG momentum strategy can lead to substantial profits in the short run and reversals in the long run. Moreover, this study reveals that investors overreact to the environmental factor more than social or governance factors.

Keywords: ESG; ESG momentum strategy; Excessive extrapolation; Investor sentiment; Momentum strategy; Overreaction hypothesis (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:63:y:2020:i:c:s0927538x19306493

DOI: 10.1016/j.pacfin.2020.101407

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