Does ESG profile depicted in CSR reports affect stock returns? Evidence from China

Xiaoling Yu, Kaitian Xiao and Tao Xu

Physica A: Statistical Mechanics and its Applications, 2023, vol. 627, issue C

Abstract: We investigate the impact of ESG on firm-year stock returns and stock portfolios’ returns, scoring firms’ ESG qualitative performance via extracting ESG-related words in standalone CSR reports of Chinese A-share listed companies during 2009 to 2020. Panel data models are used to examine the relationship between ESG scores and firm-year stock returns. ESG-extended models based on traditional factor models are proposed to examine the explanatory power of ESG information on stock portfolios’ excess returns. We find that firms’ current ESG profile depicted in CSR reports cannot be reflected in current firm-year stock returns but they can positively predict the future stock returns. The ESG factor constructed by the difference between the returns on diversified portfolios of stocks with high and low ESG qualitative score has significant explanatory power to stock portfolios’ excess returns. Especially, megacap portfolios with high ESG scores, low profitability or large book-to-market value have strong positive exposure to the ESG factor. The ESG-extended factor models have higher explanatory abilities for portfolios’ excess returns than their corresponding benchmark models. The explanatory power of ESG factor is stronger than the profitability factor but weaker than the investment factor. Besides, the new five-factor model, which consists of ESG factor replacing the profitability factor in Fama–French’s five-factor model, seems to perform better than other ESG-extended factor models.

Keywords: ESG profile; CSR report; Stock return; Portfolio; Factor model (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:627:y:2023:i:c:s0378437123006738

DOI: 10.1016/j.physa.2023.129118

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