Households-Companies Social Alignment and Portfolio Choice: The ESG Case

Abstract

This paper demonstrates that when companies’ social values are more aligned with households’, then households do exhibit greater propensity to participate in the stock market; tolerate greater financial risk; invest more and trade less, which lowers the overall volatility. Indeed, we create a households-companies social values alignment index, which reflects companies and households’ adjacent view over core social issue, especially, on ESG issues. For companies’ social value proxy, we utilize data about average companies’ ESG rating; and for households’ we construct an index that captures the overall households’ social value and sentiment toward ESG issues. We then employ Beta-time dependent econometrics technique to generate a time series data to analyze the social values alignment between households and companies to gather our inference. The underlying mechanism to identify our channels is that social alignment increases the households-companies trust and lower the cost to research for stocks. Collectively, households-companies social alignment has implications on key households’ portfolio choice decisions, and ultimately increases the overall welfare.