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How does green preference impact sustainability-based investment strategy? Evidence from the Chinese stock market

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  • Du, Qianqian
  • Su, Wanxuan
  • Liang, Dawei
  • Wang, Luying

Abstract

This study contributes to the ongoing debate on whether and how green strategy improves shareholder value. Using listed firms in the Chinese A-share market from 2008 through 2020, we find that a sustainability-based investment strategy by longing green stocks and shorting brown stocks can generate above 4% abnormal returns annually. Further investigation shows that investors' preference for green stocks increases the valuation of such stocks and contributes to the profitability of the trading strategy. We construct a green taste measure using textual analysis of over 400,000 analyst reports, finding that when agents' green tastes increase unexpectedly, the sustainability-based trading strategy generates higher returns in the future. Our findings shed light on the importance of investors' green preference on firms’ valuation.

Suggested Citation

  • Du, Qianqian & Su, Wanxuan & Liang, Dawei & Wang, Luying, 2023. "How does green preference impact sustainability-based investment strategy? Evidence from the Chinese stock market," Economic Modelling, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323001049
    DOI: 10.1016/j.econmod.2023.106292
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    More about this item

    Keywords

    Green tastes; ESG; Textual analysis; Market reaction;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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