Introducing ESG Into Characteristic-Based Benchmark Returns Open Access

Rui, Hao Chen (Spring 2022)

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This paper introduce ESG as a new characteristic into the characteristic-based benchmark return following characteristic-based benchmark method developed by Ken Daniel, Mark Grinblatt, Sheridan Titman, and Russ Wermers (DGTW) in 1997. This paper finds that the ESG augmented DGTW return significantly better explains the stock returns than the conventional DGTW return. Moreover by testing the ESG augmented DGTW return during crisis periods, this significance in explanatory power still exists. Lastly, after accounting for difference firm sizes, this paper finds that for firms within the second to the fourth quintile, there exists an increase in the explanatory power of the ESG augmented DGTW return, while it holds constant for the top and bottom quintiles.

Table of Contents

Introduction Literature Review and Hypothesis Development Literature Review Hypothesis Development Data and Methodology Data Main Sample Methodology Benchmark Portfolios DGTW Value Weighted Returns Creating Benchmark Portfolios with ESG Characteristics Crisis Periods Empirical Results Overall Comparison Crisis Periods Firm Size and ESG Scores Regression on Both Original and ESG DGTW Returns Conclusion and Further Research Questions Conclusion Further Research Questions Appendix

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