Warm-glow investment and the underperformance of green stocks

Abstract

In this paper we develop a novel theory to explain why green stocks should underperform relative to conventional stocks. We assume that investors derive utility from investing in green stocks – what we call “warm-glow” investment. We derive the theoretical implications of these preferences in a model that is an extension of the Consumption-based Capital Asset Pricing Model. We estimate the model using the Generalized Method of Moments. Our estimates of the strength of the preference for warm glow before the financial crisis are statistically significant but economically insignificant; our estimates of it after the crisis are significant both statistically and economically.