Foreign institutional investor herding and ESG ratings

This study examines whether foreign institutional investors (FIIs) herd to buy and sell stocks based on ESG ratings. The results show that FIIs are more likely to herd to buy stocks of firms with higher ESG ratings. We analyze the stock performance following buy herding of FIIs and find that, in the subsequent one month, firms with better ESG ratings experience higher returns and lower return volatility than those with poor ESG ratings. In addition, we find that firms with better ESG ratings that attract FII buy herding exhibit persistence in return performance. Thus, portfolios that long FII buy herding stocks with high ESG ratings and short FII sell herding with low ESG ratings can generate significant and more persistent subsequent returns.