The price impact of ESG ratings: Evidence from market reactions to earnings surprises

Abstract

We explore the impact of the rapidly evolving ESG investment landscape on investors’ trading behaviors. This study examines market reactions to earnings surprises for high-ESG firms, characterized by heightened responses to positive developments and more contained reactions to negative outcomes. Investors exhibit pronounced enthusiasm for positive surprises while moderating their disappointment in negative surprises, leading to distinct market responses. Analyst forecast dispersion increases when earnings surprise signs switch, indicating biased belief updates. Using Propensity Score Matching (PSM), we confirm that ESG-driven market reactions stem from investor bias rather than firm fundamentals. Post announcement returns for high-ESG firms exhibit sustained momentum, suggesting persistent optimism. These findings reveal confirmation bias as a key factor in ESG valuation premiums, influencing asset pricing, investment strategies, and behavioral finance.