Dirty Money: ESG News Affects Consumption From Dividend Income

Title: Dirty Money: ESG News Affects Consumption From Dividend Income

Abstract: We link a large dataset of individual investor trading records and current-account spending transactions to daily firm-level environmental, social, and governance (ESG)-related news. Interestingly, investors in our sample on average do not trade in response to ESG news, but the news influences consumption behavior. Specifically, we show that investors have a larger marginal propensity to consume out of dividend payouts when they are paid out by firms that have recently been associated with ESG controversies. On average, investors spend twice as much out of dividend income when received from a controversial company. Our results are consistent with social psychology theory on emotional accounting. According to the theory, individuals feel remorse for profiting from firms that inflict negative externalities on others and engage in strategic consumption to improve their well-being. We are the first to show that emotional accounting affects real-world behavior outside of the laboratory. Our results are robust against different model specifications and we rule out alternative explanations.