Investor overreaction in the BIST sustainability index : an empirical analysis from 2014-2022

Abstract

Recent emphasis on environmental stewardship by stakeholders has escalated demands for disclosures on social and environmental impacts from environmentally detrimental companies, underscoring the significance of sustainable reporting. This trend has catalyzed the emergence of sustainability indices in financial markets, highlighting corporate commitment to sustainable practices. The inclusion of firms in these indices is often perceived positively by investors, potentially influencing expectations of stock price surges. Hence, the examination of whether this inclusion prompts investor overreaction becomes pertinent. This study aims to ascertain the existence of investor overreaction to companies listed in the BIST Sustainability Index. The research encompasses companies incorporated into the Borsa Istanbul sustainability index from 2014 to 2022. Adopting the methodology of D​e​ ​B​o​n​d​t​ ​&​ ​T​h​a​l​e​r​ ​(​1​9​8​5​), this analysis investigates the prevalence of overreaction. The findings reveal that the overreaction hypothesis holds true for a one-year duration post-inclusion in the index. This indicates that investors exhibit overreaction by purchasing stocks during the initial year of a company's inclusion, yielding returns surpassing market averages. Conversely, holding these stocks for three and five years results in inadequate investor reactions and fails to secure above-market returns. This suggests that the impact of index inclusion on investor behavior is transient, diminishing in the third and fifth years. The study contributes to the discourse on behavioral finance by elucidating the nuanced effects of sustainability indices on financial market dynamics and investor behavior.