Abstract
We study how environmental, social and governance (ESG) investing reshapes information aggregation and price formation. We develop a rational expectations equilibrium model in which traditional and green investors are informed about monetary and non-monetary risks but have distinct preferences over them. Because of the preference heterogeneity, traditional and green investors trade in opposite directions based on the same information and make the price noisier to each other. We show that an increase in the share of green investors and an improvement in the quality of non-monetary information can reduce overall price informativeness and increase firm's cost of capital. Our analyses provide a rich set of testable implications.
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