Capital Market Adaptability, Investor Behaviour, and Impact

Dirk Schoenmaker and Willem Schramade
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Willem Schramade: Nyenrode Business University

Chapter 14 in Corporate Finance for Long-Term Value, 2023, pp 395-428 from Springer

Abstract: Abstract The efficient markets hypothesis states that stock prices incorporate all relevant information instantaneously. However, investor behaviour is not always fully in line with theoretical predictions. The mechanism behind efficient markets is that a sufficient number of analysts pay attention to newly arriving information, judge it value relevant, and trade on that information. In that way, the new information gets priced in. But there is evidence that learning takes time and that adaptive markets are a better description than efficient markets. In particular, it seems that analysts have been slow to pick up sustainability-related information. Moreover, stock prices only reflect the effects of (sustainability-related) information on the financial value of companies. There is no ‘market’ (yet) for the diffusion of information on the social and environmental value (impact) of companies. New regulations, scientific research, non-governmental organisations (NGOs), and ratings agencies do produce information on companies’ social and environmental impact. They create implicit markets on impact information and price-setting that are continuously evolving. These markets can be used to determine the willingness to pay for impact (and thus derive prices for impact). At the same time, a new breed of impact investors is emerging. These investors look for financial return (profit) as well as impact and may be willing to sacrifice some part of their financial return for higher impact.

Keywords: Active investing; Active ownership; Adaptive markets hypothesis; Analysts; Alpha; Assurance; Behavioural finance; Benchmarking; Beta; Bubbles; Capital asset pricing model (CAPM); Capital market competition; Cost of capital; Efficient markets hypothesis; ESG data; ESG ratings; Excessive trading; Familiarity bias; Fundamental analysis; Historical returns; Impact; Impact analysis; Impact-adjusted return; Impact investing; Impact performance; Implicit markets on impact information; Information production; Integrated return; Investor presentation; Investor relations; Irrational exuberance; Market efficiency; Market index; Passive investing; Path dependency; Performance measure; Random walk; Required return; Return on active ownership; Risk-free rate; Science-based targets; Security market line; Strong market efficiency; Sustainability performance; Tracking error; Transition preparedness; Value relevant; Willingness to pay for impact (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/978-3-031-35009-2_14

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