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Journal article
Which investor sentiment drives the ESG–return link? A multi-dimensional sentiment perspective on ESG changes
International review of economics & finance, Vol.110, 105530
2026
Abstract
This paper studies the impact of various dimensions of investor sentiment on the stock price response to changes in environmental, social and governance (ESG) ratings. In contrast to most of the existing literature that relies on a single aggregate proxy of sentiment, the present study decomposes investor sentiment into five components such as positive tone, negative tone, risk, volatility and management-related sentiment. The multidimensional design can better pinpoint the channel through which ESG-related information is incorporated into prices. The empirical results show that ESG downgrades are followed by economically meaningful negative cumulative abnormal returns, whereas upgrades generate only weak and short-lived effects. In addition, the pricing response is not conditioned equally by all sentiment dimensions. Positive sentiment is found to be the most important moderating channel. We show that the negative valuation effect of ESG downgrades is significantly stronger in a more optimistic surrounding informational environment, while the other sentiment dimensions play relatively limited roles. Our result is especially pronounced for large firms and for firms with strong pre-event ESG profiles, both of which are likely to attract greater investor attention and to be held more widely by institutional and ESG-oriented investors. The paper contributes to the literature by showing that investor sentiment should not be treated as a single conditioning variable in ESG pricing. Instead, stock price reactions reflect a multidimensional sentiment mechanism in which optimism plays the central role.
Details
- Title
- Which investor sentiment drives the ESG–return link? A multi-dimensional sentiment perspective on ESG changes
- Authors/Creators
- Ngoc Phu Tran - Murdoch UniversityAriful Hoque - Murdoch Business School, Murdoch University, Perth, AustraliaThi Le - Murdoch Business School, Murdoch University, Perth, Australia
- Publication Details
- International review of economics & finance, Vol.110, 105530
- Publisher
- Elsevier Inc.
- Identifiers
- 991005896879507891
- Copyright
- © 2026 The Authors.
- Murdoch Affiliation
- College of Business
- Language
- English
- Resource Type
- Journal article
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