How does green preference impact sustainability-based investment strategy? Evidence from the Chinese stock market

This study contributes to the ongoing debate on whether and how green strategy improves shareholder value. Using listed firms in the Chinese A-share market from 2008 through 2020, we find that a sustainability-based investment strategy by longing green stocks and shorting brown stocks can generate above 4% abnormal returns annually. Further investigation shows that investors' preference for green stocks increases the valuation of such stocks and contributes to the profitability of the trading strategy. We construct a green taste measure using textual analysis of over 400,000 analyst reports, finding that when agents' green tastes increase unexpectedly, the sustainability-based trading strategy generates higher returns in the future. Our findings shed light on the importance of investors' green preference on firms’ valuation. •A sustainability-based investment strategy generates pronounced profitability.•This study constructs an innovative proxy of agents' green preference.•Investors' green preference increases the valuation of green stocks.•The performance of the strategy strengthens with increased green preference.