Sustainability index and investors' reactions: A research on return and liquidity

Today, the management approach that focuses on increasing shareholders wealth has been replaced by a management approach that focuses on the interests of all interest groups related to the firm, and non-financial data have started to be taken into account in the evaluation of firm performance. These developments have led to an increase in firms' activities and investments in environmental, social and corporate governance areas within the scope of sustainability and the development of sustainability indices, and how investors react to the inclusion of stocks in the sustainability index has become one of the most current issues discussed in the finance literature. The purpose of this study is to investigate whether the event of inclusion in the BIST Sustainability Index (announcement and entry) has a statistically significant effect on stock returns and liquidity. In the study covering the years 2014-2021, event study methodology is used and 67 sustainability index inclusion events are analyzed. In the study, six different event window groups were created to see the existence of an anticipation effect before the announcement, price changes after the announcement and entry date, price changes between the announcement date and the entry date, and the permanent in price changes. The results show that on the day following the announcement date and in the period between the day following the announcement date and the entry date, investors reacted positively and a return above the market return could be achieved. In other words, the results suggest an investment strategy of buy following the announcement date and hold until the entry date. It has been determined that the significant price changes in other words the positive investor reaction caused by index inclusion occur after the announcement date rather than on and after the entry date. Inclusion in the sustainability index announcement event did not have an anticipation effect that would increase the cumulative abnormal trading volume ratio before the announcement date, and similarly, it did not have an effect that would increase liquidity after the announcement date. Statistically significant and negative cumulative abnormal trading volumes are found in the event windows after the event of entering the sustainability index. This suggests that the impact on liquidity is mostly occurs after the index entry event and the effect is predominantly negative. Keywords: Borsa İstanbul, Sustainability Index, Index Inclusion, Abnormal Return, Abnormal Trading Volume, Liquidity, Event Study.