Corporate ESG scores and equity market misvaluation: Toward ethical investor behavior

Corporate sustainability is of paramount importance in today's business landscape. Previous works have shown that ESG practices contribute to increase firm long-run value. However, whether and how equity market values corporate sustainability remains little explored. In this paper, we investigate the impact of corporate ESG scores on equity market misvaluation. Using data from 221 French listed firms over 2002-2021, our main findings show that ESG scores increase equity misvaluation by exacerbating (mitigating) equity overvaluation (undervalua-tion). This effect holds even in times of crisis and is more pronounced for firms with low analyst coverage. Furthermore, we find that firms with moderate ESG scores exhibit positive abnormal returns. Overall, our empirical results suggest that sustainable activities are associated with a "halo effect", enhancing firm reputation and investor perception. This positive perception promotes ethical investing behavior and then assigns value to high ESG rating company.