ESG performance, herding behavior and stock market returns: evidence from Europe

Abstract

This paper tests how financial performance indicators and combined ESG score for large-cap stocks impact on stock return. In particular, we examine how market capitalization, price to book value, Sharpe ratio and ESG score of large-cap firms in Europe are related to their stock performance. We consider a panel data consisting of six European countries—Portugal, Italy, Greece, Spain, France and Germany—for the period 2010–2020. For Greek and French firms, a firm’s size tends to negatively affect its stock returns. The investors in European countries (except Italy) do not jeopardize their returns by investing in highly ESG scoring firms. We argue that the benefit of not investing in highly ESG-scoring firms might lead investors to select smaller size companies with a higher price to book value and higher Sharpe ratio, as it is more likely to generate higher returns. Moreover, Italian firms are more susceptible to ESG issues, as ESG performance and stock return seem to have a significant negative correlation. This valuable result was confirmed by conducting a robustness test for Europe as a whole using the Euronext100 index. Finally, we find no evidence that ESG motivates herding in our selected sample (this is not the case for Greece and France), while we report evidence of ESG herding behavior during the Covid-19 outbreak in Portugal, Italy and Greece.

Investigation of herding behavior using machine learning models

“…We use a more robust measure called Cross-Sectional Absolute Deviation (CSAD) presented by Chang et al . (2000) and Gavrilakis and Floros (2023).…”

“…While investigating the herd behavior in Asian and European stock markets during the COVID-19 pandemic it is found that most of the European and UK market remained inefficient during the time of pandemic which resulted in market destabilization. A similar study conducted by Gavrilakis and Floros (2023) investigates the impact of herding behavior on stock returns in six selected European stock markets. In the recent literature of herding behavior, Spillover of herd anomaly has gained an increasing interest of researchers.…”

“…In order to test the herding anomaly, Cross-Sectional Standard Deviation (CSSD) of asset returns is mostly used as a measure of dispersion in the returns in literature. We use a more robust measure called Cross-Sectional Absolute Deviation (CSAD) presented by Chang et al (2000) and Gavrilakis and Floros (2023).…”

ESG Consciousness in Mutual Fund Advisory: Examining Attitudes, Intentions, and Moderating role of Fund Fundamentals and Herding Bias

“…Herding tendency signi cantly impacts advisors' perspectives on ESG investments, a phenomenon empirically validated in studies conducted in Portugal, Italy, and Greece(Gavrilakis & Floros, 2023). (Garg, Goel, Sharma, & Rana, 2022) had previously posited that contingent upon the prevailing attitudes within their personal and professional networks, herding tendencies may either amplify or mitigate the positive or negative attitudes held by investors towards socially responsible investments.…”

Impact of Liquidity and Investors Sentiment on Herd Behavior in Cryptocurrency Market

“…While herd behavior has been extensively studied in financial markets (Gavrilakis and Floros 2023;Bougatef and Nejah 2023;Fei and Zhang 2023;Yang and Chuang 2023;Tlili et al 2023;Bogdan et al 2022;Bouri et al 2021), its study in the cryptocurrency market is still limited. Therefore, this article focuses on herd behavior in the crypto market for several reasons.…”