Abstract: Purpose: In this paper, we examine the market reaction to listed firms’ inclusion in and exclusion from 11 MSCI ESG indexes in the period 2011-2021. We conduct a cross-industry, -sector and -geography analysis of firms’ returns, volumes and institutional ownership variations. Methodology: The event study methodology is employed to measure the abnormal returns and abnormal trading volumes of affected firms. Findings: We detect positive, significant abnormal trading volumes on the day of the event, consistent with a strong portfolio rebalancing linked to the changes on the indices composition. We also find that investors reward firms signalled as sustainability leaders through their index admission, and punish the excluded companies: we detect statistically significant and positive (negative) abnormal returns of admitted (excluded) firms. Finally, we find that both long-term and short-term institutional investors increase their participation in admitted firms, while reducing their ownership in excluded companies. Managerial implications: Shareholders and institutional investors price the inclusion of listed firms in ESG financial indexes. On one side, these results should induce top managers to consider the membership in ESG indices as a strategic driver, that create market value; on the other side, they highlight the market power of ESG index providers and the soaring of a new agency problem, that should be carefully addressed by regulators. Research limitations: Detecting the weight of passive investments linked to ESG indices would contribute to a more granular assessment of the market reaction to indexes’ rebalancing, distinguishing the effect of the disclosure of new information from mechanical portfolio rebalancing. Originality: This study adds original empirical evidence to the literature regarding ESG and firms value, as well as original findings about index rebalancing and the behaviour of institutional investors.
The market power of ESG-Index providers. The Effects of the Rebalancing of ESG-Themed Indices
Roberto Barontini;Luigi Gioja
2023-01-01
Abstract
Abstract: Purpose: In this paper, we examine the market reaction to listed firms’ inclusion in and exclusion from 11 MSCI ESG indexes in the period 2011-2021. We conduct a cross-industry, -sector and -geography analysis of firms’ returns, volumes and institutional ownership variations. Methodology: The event study methodology is employed to measure the abnormal returns and abnormal trading volumes of affected firms. Findings: We detect positive, significant abnormal trading volumes on the day of the event, consistent with a strong portfolio rebalancing linked to the changes on the indices composition. We also find that investors reward firms signalled as sustainability leaders through their index admission, and punish the excluded companies: we detect statistically significant and positive (negative) abnormal returns of admitted (excluded) firms. Finally, we find that both long-term and short-term institutional investors increase their participation in admitted firms, while reducing their ownership in excluded companies. Managerial implications: Shareholders and institutional investors price the inclusion of listed firms in ESG financial indexes. On one side, these results should induce top managers to consider the membership in ESG indices as a strategic driver, that create market value; on the other side, they highlight the market power of ESG index providers and the soaring of a new agency problem, that should be carefully addressed by regulators. Research limitations: Detecting the weight of passive investments linked to ESG indices would contribute to a more granular assessment of the market reaction to indexes’ rebalancing, distinguishing the effect of the disclosure of new information from mechanical portfolio rebalancing. Originality: This study adds original empirical evidence to the literature regarding ESG and firms value, as well as original findings about index rebalancing and the behaviour of institutional investors.| File | Dimensione | Formato | |
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2023 Barontini & Gioja - SIIIC Rome.pdf
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