Asian Review of Financial Research

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Asian Review of Financial Research Vol.33 No.3 pp.403-437
ESG Performance Evidence from Mispricing and Idiosyncratic Volatility
Junesuh Yi1†
1 동국대학교 교수
Key Words : ESG; 투자성과; 가격오류; 고유변동성; 스튜어드십 코드; 이상 현상;ESG; Mispricing; Idiosyncratic volatility; Stewardship code; Investor types

Abstract

This study explores the cause of the adverse relationship between ESG performance and corporate value through mispricing and idiosyncratic volatility. It calculates the rate of return for each ESG grade and the rate of return based on the degree of mispricing and idiosyncratic volatility. It also measures the returns of the group portfolios, which consist of a combination of the ESG grade and the degree of mispricing or the degree of idiosyncratic volatility. In addition, it calculates the net buying ratio by investor types on the ESG rating, and measures the investment performance by investor types by comparing the net buying ratio and returns of the group portfolios composed of ESG and mispricing or idiosyncratic volatility. This study finds that the ESG grade inversely relates with the rate of return. However, A+ grades display exceptionaly high returns. While idiosyncratic volatility presents a negative relationship with the rate of return, mispricing presents a positive relationship with the rate of return; thus, it is found that there is no arbitrage opportunity for financial transactions due to mispricing. On return analysis of the group portfolios composed of both ESG ratings and mispricing, the overvalued stock shows a higher return, so that mispricing is not corrected on a quarterly basis. Particularly, in the case of grade A or higher, the underestimated group displays a very large negative return. The return analysis of the group portfolios consisting of a combination of ESG rating and a degree of idiosyncratic volatility shows that the group with low idiosyncratic volatility presents higher returns than the group with high volatility. On the other hand, in the case of grades A and above, the group with low idiosyncratic volatility shows negative returns. A similar lower level of return for grade A or higher with undervalued and low idiosyncratic volatility portfolios is also found in groups composed of three-dimensional combinations of mispricing, performance persistence, and ESG ratings. Therefore, this is taken to be the cause of the return abnormality of the ESG excellence grade. On the other hand, corporate governance as sub-sector of ESG presents somewhat different results from environment or social responsibility. It shows higher returns in the group of grade A or higher corporate governance with underestimated and low idiosyncratic volatility. In addition, even in groups composed of three dimensions such as mispricing, idiosyncratic volatility, and governance ratings, the group (LL) with undervalued and low idiosyncratic volatility displays the second highest return. Accordingly, it is inferred that the market gives some degree of confidence in the level of governance. Upon analysis of the net purchase ratio for the ESG ratings by investor types, it is found that pension funds carry out the most faithful trading strategy on the ratings. The pension funds record net purchases for all grades of sub-sectors and demonstrate that the higher the grade on sub-sectors, the higher the net purchase ratio. In contrast, institutional investors present net sales in all cases except in the group of A or higher governance structure. On analyses of the groups consisting of ESG grades and mispricing or idiosyncratic volatility by investor types, institutional investors, pension funds, and individual investors present a higher net purchasing ratio on groups with overestimated and higher idiosyncratic volatility while foreign investors accomplish a higher net purchasing ratio on groups with lower idiosyncratic volatility. Consequently, the foreign investors present the best performance through smart trading strategy that they show net purchase to overestimated stocks, net sales of underestimated stock, and higher net purchase of low idiosyncratic volatility stocks whereas individual investors exhibit the lowest performance.
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