| Abstract |
The ESG (environmental, social, and governance) practice has become very important in contemporary business and it is believed to have a significant impact on firm value. However, there still lacks a consensus on the underlying mechanism connecting ESG and firm value. We argue that ESG can impact firm value through two possible channels:investor attention and investor sentiment. Exploiting user-generated content from a popular online investment community (Seeking Alpha) and ESG ratings from a professional database (Sustainalytics), we run a fixed-effect panel regression and find an overall positive relationship between ESG ratings and investor attention but no relationship between ESG ratings and investor sentiment. We then conduct an event-study analysis, in which we classify changes in ESG ratings as upgrade events and downgrade events and find that the significant relationship between ESG and investor attention still holds for the downgrade events but not for the upgrade ones. We conduct various robustness checks, on both ESG and investor attention, to rule out potential effects of other factors, such as firm size, debt, intangible assets, and profitability. Our further mechanism analysis reveals that the effect of ESG ratings on investor attention is driven by the social and governance factors rather than the environmental factors. Our work makes both theoretical and practical contributions by identifying the channel through which ESG affects firm value in the age of social media. |