Research

Job Market Paper

The Silver Lining of Investor Disagreement: Reducing Risk with "Smart" ESG Transitions

Abstract: Investor disagreement is known to generate excess volatility in the stock market. This paper finds that the opposite could be true for ESG stocks. I build a general equilibrium model where investors disagree on the financial payoff of ESG stocks. With the presence of this disagreement, firms whose financial performance is positively correlated with their ESG performance enjoy less volatile stock returns. In contrast, firms that incur a financial loss in their ESG transition face higher volatility. Being able to use the ESG transition to ``grow the pie” is thus associated with less market risk. I provide empirical evidence for this finding.

Presentations: 14th FMCG Conference 2024 at Monash Malaysia (Best Paper Award), 2025 Midwest Finance Association Annual Meeting, 19th Conference on Asia-Pacific Financial Markets, RBFC 2024 at Vrije University Amsterdam, 2024 FMA Doctoral Student Consortium, 17th Annual Meeting of ABF&E, IRMC 2024 at Bocconi University, 2024 FMA European Doctoral Student Consortium, ESSEC Business School

Working Paper

Abstract: Over thirty trillion dollars are allocated to ESG assets, despite the uncertainty on the true sustainability level of firms. We show within a dynamic portfolio allocation model that the effect of this uncertainty on investors' portfolios and welfare strongly depend on their preferences. Based on institutional investors' holdings, we identify two types of investors with non-pecuniary preferences: green investors whose utility increases with the estimated sustainability of firms, and threshold investors, whose non-pecuniary preferences only depend on whether a firm's estimated sustainability level is below or above a threshold. We show that ESG rating uncertainty is more costly for green investors than for threshold investors.

Presentations: Erasmus University Rotterdam, ESSEC Brown Bag 2024, ESSEC Student Research Seminar 2023

Work in Progress

ESG Rating Disagreement and Stock Return (solo-authored)

Abstract: Existing empirical evidence suggests that ESG rating disagreement is positively associated with the return of ESG stocks. This paper provides a mechanism that explains this result. I build a general equilibrium model where investors have a non-pecuniary preference for sustainability and receive different signals about the ESG performance of assets. The precision of the signal is negatively associated with the level of ESG rating disagreement. My model shows that ESG rating disagreement leads to a risk premium that pushes up stock return. Investors thus demand higher returns when ESG ratings are less consistent.