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Corporate ESG Scores and Equity Market Misvaluation: Toward Ethical Investor Behavior

Author

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  • Z. Barka
  • Taher Hamza

    (Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School)

  • S. Mrad

Abstract

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\textendash2021, our main findings show that ESG scores increase equity misvaluation by exacerbating (mitigating) equity overvaluation (undervaluation). 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. \textcopyright 2023

Suggested Citation

  • Z. Barka & Taher Hamza & S. Mrad, 2023. "Corporate ESG Scores and Equity Market Misvaluation: Toward Ethical Investor Behavior," Post-Print hal-04435551, HAL.
    • Handle: RePEc:hal:journl:hal-04435551
    DOI: 10.1016/j.econmod.2023.106467
    Note: View the original document on HAL open archive server: https://normandie-univ.hal.science/hal-04435551v1
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    References listed on IDEAS

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    Cited by:

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    2. Jancy Phore & Ashish Kumar & Bharti & Deepa & Suman Ahuja & Nupur Soti, 2026. "Mapping the Intellectual Landscape of ESG: A Bibliometric and Thematic Approach," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 33(2), pages 2998-3018, March.
    3. Tian, Lichuan & Sun, Kai & Yang, Jie & Zhao, Yang, 2024. "Does digital economy affect corporate ESG performance? New insights from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 964-980.
    4. Rahat, Birjees & Nguyen, Pascal, 2024. "The impact of ESG profile on Firm's valuation in emerging markets," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    5. Yang, Zhonghai & Song, Pingting & Xu, Meng & Li, Yingmei, 2024. "Environmental, social and governance performance and equity mispricing: Does embedded information mediation matter?," Finance Research Letters, Elsevier, vol. 67(PB).
    6. Li Meiyi & Gan Yufei, 2025. "More Philanthropy, More Consistency? Examining the Impact of Corporate Charitable Donations on ESG Rating Uncertainty," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 19(1), pages 1-21.
    7. Burcu Dinçergök & Burak Pirgaip, 2025. "Financial Constraints and the ESG–Firm Performance Nexus in the Automotive Industry: Evidence from a Global Panel Study," Sustainability, MDPI, vol. 17(15), pages 1-28, July.
    8. Chenhui Lu & Caitian Wu & Linjie Feng & Jinghui Zhan & Yi Shi & Huangxin Chen, 2025. "Does ESG Performance Enhance Corporate Green Technological Innovation? Micro Evidence from Chinese-Listed Companies," Sustainability, MDPI, vol. 17(2), pages 1-25, January.
    9. Dallocchio, Maurizio & D’Ercole, Francesco & Frascati, Domenico & Mariani, Massimo, 2025. "Climate transition and the speed of leverage adjustment," International Review of Financial Analysis, Elsevier, vol. 102(C).
    10. Liang, Jinma & Zhang, Yicheng & Li, Yuanheng, 2024. "The role of ESG scores in ESG fund performance and institutional investor selection," Finance Research Letters, Elsevier, vol. 65(C).
    11. Mokni, Khaled & Nammouri, Hela & Dhaoui, Chedia & Ben Jabeur, Sami, 2025. "Is a picture really worth a thousand words? Investigating the impact of investor sentiment on sustainable stocks," Finance Research Letters, Elsevier, vol. 81(C).
    12. Wu, Liangpeng & Tang, Yujing & Meng, Lei & Zhu, Qingyuan & Zhou, Dequn, 2025. "Navigating ESG rating divergence: Implications for labor investment efficiency and firm adaptation strategy," Global Finance Journal, Elsevier, vol. 67(C).
    13. Ferdaous Zouaghi & Teresa Garcia‐Marco & Marian Garcia Martinez, 2024. "Navigating firm financial distress in turbulent times: The impact of the institutional context," Business Strategy and the Environment, Wiley Blackwell, vol. 33(8), pages 8037-8054, December.
    14. Ruan, Lei & Li, Jianing & Huang, Siqi, 2025. "ESG rating adjustment and capital market pricing efficiency: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 98(C).

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