Socially Responsible Investors and Stock Price Informativeness

We study how socially responsible investors (SRIs) affect information incorporation in price. We find that a higher level of socially responsible institutional ownership results in a lower level of informativeness of current returns on future earnings. Using an exogenous shock to SRI ownership, we show this relationship is causal. Such effect is strengthened when the ESG information attracts more attention from SRIs. Meanwhile, the market reaction to earnings (ESG) news turns weaker (stronger) with the increase in SRIs’ holding. We conclude that SRIs, due to their ESG preferences, weight less (more) on earnings (ESG) information and thus hinder (facilitate) the incorporation of earnings (ESG) information into the stock price. Additional evidence indicates that SRIs enhance the relation between current returns and future ESG performance.