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ESG rating disagreement and stock returns: Evidence from China

Author

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  • Wang, Jianli
  • Wang, Shaolin
  • Dong, Minghua
  • Wang, Hongxia

Abstract

Environmental, social, and governance (ESG) ratings are receiving increasing attention in the financial market. However, ESG rating disagreement creates a barrier to ESG investment. This study explores empirically how ESG rating disagreement affects the Chinese capital market based on rating data from six agencies. The results show that ESG rating disagreement has a significant negative impact on stock returns. Mechanism analysis indicates that ESG rating disagreement can lead to decreased investor sentiment and, subsequently, a drop in stock returns. Heterogeneity analysis reveals that this negative impact is more pronounced in non-state-owned enterprises, companies with higher average ESG ratings, and those with fewer institutional investors. Moreover, the governance dimension is the crucial factor driving the drop in stock returns. Therefore, investors and decision makers should consider comprehensive information from multiple agencies when assessing ESG ratings to help mitigate decision bias.

Suggested Citation

  • Wang, Jianli & Wang, Shaolin & Dong, Minghua & Wang, Hongxia, 2024. "ESG rating disagreement and stock returns: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finana:v:91:y:2024:i:c:s1057521923005598
    DOI: 10.1016/j.irfa.2023.103043
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    More about this item

    Keywords

    ESG; Rating disagreement; Stock returns; Investor behaviour;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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