Warm-Glow Investment and the Under-Performance of Green Stocks

Johannes Kabderian Dreyer; Vivek Sharma; William T. Smith

Warm-Glow Investment and the Under-Performance of Green Stocks

Johannes Kabderian Dreyer^*, Vivek Sharma, William T. Smith

^*Corresponding author for this work

Research output: Contribution to conference › Paper › Research › peer-review

Abstract

In this paper we develop a novel theory to explain why green stocks should underperform relative to conventional stocks. We assume that investors derive utility from the act of investing in green stocks – what we call “warm-glow” investment. We derive the theoretical implications of these preferences in a model that is an extension of the CCAPM. We estimate the model using the Generalized Method of Moments. Our estimates of the strength of the preference for warm-glow are statistically significant, but economically insignificant before the financial crisis. After the crisis they are both statistically and economically significant.

Original language	English
Publication date	2020
Publication status	Published - 2020
Event	Financial Management Association Virtual Conference 2020 - Duration: 19 Oct 2020 → 23 Oct 2020 https://www.fma.org/virtual2020

Conference

Conference	Financial Management Association Virtual Conference 2020
Period	19/10/2020 → 23/10/2020
Internet address	https://www.fma.org/virtual2020

Keywords

Warm-glow
ESG
Green Preferences
Asset-Pricing
Asset Smoothing Effect
Green Stocks

Link to document

http://www.fmaconferences.org/NY2020/Papers/WarmglowInvesting.pdf

Cite this

@conference{fc33da64cdd84a608c4147c411dc3f2e,

title = "Warm-Glow Investment and the Under-Performance of Green Stocks",

abstract = "In this paper we develop a novel theory to explain why green stocks should underperform relative to conventional stocks. We assume that investors derive utility from the act of investing in green stocks – what we call “warm-glow” investment. We derive the theoretical implications of these preferences in a model that is an extension of the CCAPM. We estimate the model using the Generalized Method of Moments. Our estimates of the strength of the preference for warm-glow are statistically significant, but economically insignificant before the financial crisis. After the crisis they are both statistically and economically significant. ",

keywords = "Warm-glow, ESG, Green Preferences, Asset-Pricing, Asset Smoothing Effect, Green Stocks",

author = "Dreyer, {Johannes Kabderian} and Vivek Sharma and {T. Smith}, William",

year = "2020",

language = "English",

note = "Financial Management Association Virtual Conference 2020<br/> , 2020 FMA ; Conference date: 19-10-2020 Through 23-10-2020",

url = "https://www.fma.org/virtual2020",

}

TY - CONF

T1 - Warm-Glow Investment and the Under-Performance of Green Stocks

AU - Dreyer, Johannes Kabderian

AU - Sharma, Vivek

AU - T. Smith, William

PY - 2020

Y1 - 2020

N2 - In this paper we develop a novel theory to explain why green stocks should underperform relative to conventional stocks. We assume that investors derive utility from the act of investing in green stocks – what we call “warm-glow” investment. We derive the theoretical implications of these preferences in a model that is an extension of the CCAPM. We estimate the model using the Generalized Method of Moments. Our estimates of the strength of the preference for warm-glow are statistically significant, but economically insignificant before the financial crisis. After the crisis they are both statistically and economically significant.

AB - In this paper we develop a novel theory to explain why green stocks should underperform relative to conventional stocks. We assume that investors derive utility from the act of investing in green stocks – what we call “warm-glow” investment. We derive the theoretical implications of these preferences in a model that is an extension of the CCAPM. We estimate the model using the Generalized Method of Moments. Our estimates of the strength of the preference for warm-glow are statistically significant, but economically insignificant before the financial crisis. After the crisis they are both statistically and economically significant.

KW - Warm-glow

KW - ESG

KW - Green Preferences

KW - Asset-Pricing

KW - Asset Smoothing Effect

KW - Green Stocks

M3 - Paper

T2 - Financial Management Association Virtual Conference 2020<br/>

Y2 - 19 October 2020 through 23 October 2020

ER -