The impact of institutional investors on ESG: Evidence from China

This paper studies the influence of institutional ownership on the Chinese A-shares' ESG performance. Findings reveal the positive improvement from institutional investors, and this impact is stronger in firms with better-expected ESG performance and low initial ESG performance. Besides, heterogeneous institutional investors have different influences, and only a pressure-resistant institution plays the promotion role. Further studies based on the period following the financial crisis and when emphasising the environmental protection policy reveal that financial motivation and reputation motivation could be the reason for institutional holding. Our findings are robust after using the instrumental variable analysis, controlling for firm fixed effects, and replacing institutional holdings, and could be beneficial for the governance of firms in China.     

The role of ESG scoring and greenwashing risk in explaining the yields of green bonds: A conceptual framework and an econometric analysis

This article aims to investigate the factors that most influence the yields of public sector and corporate green bonds besides those conveyed by the conventional finance theory (e.g., rating, volatility, maturity). To accomplish that, we first develop a theoretical framework that postulates the negative relationship between the size of the underlying project financed by a green bond issuance, the use of the ESG metrics to quantify such impact, as well as the positive relationship between the risk of greenwashing practices by the issuer, and the yield to maturity of the green bond. We then provide an empirical validation of our conceptual framework by estimating multiple regression models applied to two distinct samples of public and corporate green bonds issued globally in the 2012–2020 period. The reliability of our results is confirmed by further exploring the effects of some key determinants on the yield spread of green versus comparable ordinary bonds of corporate issuers. Our findings corroborate our theoretical predictions showing that investors are inclined to accept lower returns in exchange for contributing to the funding of infrastructure projects with greater impact on the sustainability of target communities or territories and require higher premia as a form of compensation when being exposed to higher risk of greenwashing by issuers. At corporate level, greenwashing risk is higher among manufacturing (rather than services) firms but more pronounced in the financial sector. At public level, greenwashing strategies may be more easily pursued by multinational or sovereign issuers rather than local governments as the former's greater distance from communities enables them to elude investors' controls. Important recommendations are drawn for investors, rating agencies, and policymakers.     

ESG,time horizons,risks and stock returns

Investment time horizon is an important part of significance of ESG factors. This research examines the role of ESG factors in returns and risks in short- and medium-term investment periods. It compares (a) the returns and risks of ESG portfolios between before scoring and after scoring, and (b) the returns and risks between ESG portfolios and their peers.The main results suggest that after scoring most short-term ESG portfolios have similar returns, but lower risks than before scoring. The returns of ESG portfolios are similar to those of nonESG portfolios for both short- and medium-term. There are more ESG portfolios, whose risks are different from nonESG portfolios, in the short-term investment than in the medium-term.ESG factors therefore play a greater role in risks than in returns, and in the short-term than in the medium-term. Additionally, the role of ESG factors in risks varies from industry to industry.     

Retail clientele and option returns

Does the retail clientele matter for option returns? By delta-hedging options and trading straddles, thus allowing a focus on volatility, this paper empirically shows that a higher retail trading proportion (RTP) is related to lower option returns. Long-short portfolios involving options on low and high RTP stocks generate significantly positive abnormal returns. The results suggest that retail investors speculate and pay a lottery premium on the expected future volatility, resulting in more expensive options with higher implied volatilities.     

Take it with a pinch of salt—ESG rating of stocks and stock indices

This paper investigates the environmental, social, and governance (ESG) ratings of 20 leading stock exchange indices by analyzing and aggregating ratings of underlying stocks. ESG ratings are increasingly important inputs to sustainable investments in the European Union and United States with the phasing-in disclosure regulations. We find that ratings from two different rating providers (Sustainalytics and Refinitiv) for the same listed stocks are only weakly correlated, even if the scaling differences of the ratings are adjusted. Monte Carlo simulations are conducted to estimate how the choice of major ESG rating inputs (i) aggregation formula, (ii) weighting scheme and (iii) data provider influence the uncertainty of ratings and thus indirectly the sustainable investment process. The simulations reveal that the uncertainty is primarily related to choice of the ESG rating provider. We found that the popular best-in-class portfolio selection could be built on ESG scores. In lower segments of the ESG asset universe, investment selection becomes more challenging due to the increasing uncertainty of ratings. Finally, the paper shows that exchanges in the European Union provide relatively good ESG investment opportunities in international comparison.     

A logit model of retail investors' individual trading decisions and their relations to insider trades

Among the various external information sources that influence individual investors' trading decisions, no research has considered the important influence of insiders' transactions. Retail investors might copy the behavior demonstrated by insiders' trading; therefore, this study establishes an approach to estimate the buying probability for a certain stock by a certain investor at a certain point in time and analyzes whether insider trade reports influence this probability. Using a sample of more than 270,000 retail trades in Germany between 2008 and 2009, along with more than 3000 insider trades in the same period, we find evidence of copying of insiders' trades by retail investors. The basic mimicry hypothesis holds, even when we consider an information event hypothesis and an insider attention effect hypothesis as alternative explanations. A robustness test also supports the findings.     

Retail investor attention and the limit order book: Intraday analysis of attention-based trading

We are the first to examine how intraday changes in retail investor attention, measured by hourly Google searches, affect trading activity and informativeness of trades. High levels of Google search activity are followed in the next hour by more intensive trading in all stocks. The increased trading activity is initiated by retail investors as evidenced by the reduced size of new orders. After googling a company, retail investors do not become informed in the traditional sense; rather, they act as noise traders, who mistake noise for information, as their orders are picked off by truly informed traders.     

Corporate stakeholders,corporate valuation and ESG

In addition to explicit contracts, corporations issue their stakeholders implicit claims, including fair treatment of employees and the promise of continuing service to customers. Corporate value is created by selling these implicit claims for more than it costs to honour them. Recently, a new class of non-investor stakeholders, related to environmental, social and governance (ESG) issues, has arisen. Although many ESG advocates stress their role in creating shareholder value, they do not explain how this value creation occurs. This paper shows that implicit claims provide a critical link that ties non-investor stakeholders and ESG to shareholder value, both its creation and its possible destruction.     

Retail investors exonerated: the case of the January effect

We dispel the belief that the January effect is due to retail investor trading. Previous studies suggest that retail investors, affected by behavioural biases and disproportionally invested in small capitalization stocks, are the source of the January effect. Furthermore, the literature regards retail investor trading and the tax‐loss selling hypothesis as essentially the same explanation. We separate tax implications and market capitalization to show that retail traders are not the cause of the January effect. Our study is an important direct test of whether retail trading causes market anomalies.     

The characteristics of informed trading: Implications for asset pricing

This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. We develop a PPIN factor and show that it dominates the Amihud factor in asset returns. Our results provide strong support for information risk affecting asset returns in long sample tests.     

Option trading and individual investor performance

This paper examines the impact of option trading on individual investor performance. The results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading. We attribute the detrimental impact of option trading on investor performance to poor market timing that results from overreaction to past stock market returns. High trading costs further contribute to the poor returns on option investments. Gambling and entertainment appear to be the most important motivations for trading options while hedging motives only play a minor role. We also provide strong evidence of performance persistence among option traders.     

Retail investor attention and firms' idiosyncratic risk: Evidence from China

This paper investigates retail investor attention to firms' idiosyncratic risk in China. We use the Baidu search index as a proxy for attention and test its effect on Chinese firms' idiosyncratic risk from 2011 to 2017. Our empirical results suggest investor attention has a positive impact on firms' idiosyncratic risk. This effect is robust to possible endogeneity issues and alternative channels of effects and is stronger for small firms. Additional analysis finds that the effect of our proxy for attention on firms' idiosyncratic risk is stronger than investor sentiment and traditional attention proxies, including announcements, media news, analyst ratings, and brokerage reports. These findings provide evidence of retail investor attention could increase firms' contemporaneous idiosyncratic risk, and decrease firms' subsequent period risk.     

Financial constraints and asset pricing: comprehensive evidence from London Stock Exchange

This study provides comprehensive evidence on the pricing of financial constraints (FC) risk on London Stock Exchange during the period 1988–2013. Utilizing a large number of proxies for FC, we find that investors are not compensated with higher premia for holding shares of financially constrained firms. To the contrary, in most of the cases, the most constrained firms significantly underperform, both statistically and economically, the least constrained ones. Focussing on the Whited–Wu index to construct a zero-cost FC factor that goes long the most constrained firms and sells short the least constrained ones, we find that this factor carries a significantly negative premium and it is priced in the cross-section over and above the commonly used risk factors.     

Mutual fund portfolio trading and investor flow

I estimate the extent to which mutual fund portfolio trading of securities is triggered by investor flows into and out of the funds, and find that this liquidity-induced portfolio trading activity is smaller than previously estimated by Edelen (1999). I obtain estimates from a much larger and broader sample of funds than Edelen’s (1999) sample. Portfolio managers of international funds trade a smaller fraction of investor flow than do those of domestic funds. Index funds invest a larger fraction. A funds’ usage of futures contracts does not have a statistically significant effect on how it trades in response to investor flows, but the unpredictability of investor flow weakly affects the trading response to flow.     

The Distribution of Information among Institutional and Retail Investors in IPOs

This study examines investor performance in IPOs using a unique database comprising 85,384 investors and 29 offerings from Finland. The evidence indicates that on average institutional investors do not obtain larger initial returns than retail investors, as the incentive to acquire information is limited by allocation rules which favour small orders. This result is in contrast to findings by Aggarwal et al . (2002), who show that institutional investors perform better in a bookbuilding environment. Within each investor category, however, large orders are associated with the best performance, suggesting that information differences figure more importantly within rather than between categories.     

ESG,risk, and (tail) dependence

While environmental, social, and governance (ESG) trading activity has been a distinctive feature of financial markets, the debate if ESG scores can also convey information regarding a company’s riskiness remains open. Regulatory authorities, such as the European Banking Authority (EBA), have acknowledged that ESG factors can contribute to risk. Therefore, it is important to model such risk dependencies and quantify what part of a company’s riskiness can be attributed to the ESG scores. This paper aims to question whether ESG scores can be used to provide information on (tail) riskiness. By analyzing the (tail) dependence structure of companies with a range of ESG scores, that is within an ESG rating class, using high-dimensional vine copula modeling, we are able to show that risk can also depend on and be directly associated with a specific ESG rating class. Empirical findings on real-world data show positive not negligible ESG risks determined by ESG scores, especially during the 2008 crisis.     

Are investors really home-biased when investing at home?

Investors who only invest in their domestic market are typically referred to as being home-biased. We refer to firm-level internationalization and call into question whether investing in domestic stock indices actually leads to home bias. We use three measures of firm-level internationalization based on percentages of foreign sales, employees in foreign countries, and foreign tax payments. We aggregate firm-level results to determine the degree of internationalization of German, French, UK and US stock indices. French and UK stock indices exhibit the largest degree of internationalization. The German index provides slightly less internationalization, whereas internationalization of the US index is lowest but nonetheless considerable. This means that investors who invest in their domestic market do not necessarily suffer from home bias. Instead, investing in domestic stock indices more likely prevents investors from a home bias instead of entrapping them to insufficient portfolios.     

Secret Recipe of IPO survival: ESG disclosure and performance

While ESG initiation and disclosure may help newly listed companies maintain a social license to operate, mitigate information asymmetry, and attract investor attention, it may impose significant costs on initial public offering (IPO) firms and magnify agency problems. Using a sample of 1102 IPOs issued in the U.S and the ESG data from MSCI between 1999 and 2016, the paper empirically tests the competing hypotheses and examines the influence of ESG disclosure and performance on the survivability of IPOs. We document that (1) voluntary ESG disclosure reduces IPO failure risks and improves long-run performance of IPO; (2) the sooner ESG information is disclosed after the IPO, the greater the likelihood of survival and better long-run performance; and (3) IPOs with better ESG score are less likely to fail, with the impact largely attributable to the company's social and governance performance. Our findings identify new failure risks for IPOs, supply evidence of value-relevance of ESG, and provide practical guidance for managers.     

Institutional investor sentiment and aggregate stock returns

This paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed and that their sentiment helps to tilt stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this study, we add to the large number of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioural phenomenon, on market efficiency and price discovery.