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What do we learn from ratings about corporate social responsibility? New evidence of uninformative ratings

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  • Yang, Ruoke

Abstract

The rise of investments professionally managed with a socially responsible mandate has generated growing interest in environmental and social ratings. However, it is not clear how informative these ratings are or whether they are distorted by greenwashing. Based on the ratings of the leading provider, I offer the first evidence linking greenwashing to ratings inflation. Better ratings do not predict less future corporate bad behavior. This is of concern because it undermines the signaling value of these ratings. To understand these results, I develop a model where the rating agency may underinvest in greenwashing detection while firms have incentives to window dress and engage in greenwashing. Finally, controlling for greenwashing improves ratings predictive quality.

Suggested Citation

  • Yang, Ruoke, 2022. "What do we learn from ratings about corporate social responsibility? New evidence of uninformative ratings," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:jfinin:v:52:y:2022:i:c:s104295732200047x
    DOI: 10.1016/j.jfi.2022.100994
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    Cited by:

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    2. Leonardo Gambacorta & Salvatore Polizzi & Alessio Reghezza & Enzo Scannella, 2023. "Do banks practice what they preach? Brown lending and environmental disclosure in the euro area," BIS Working Papers 1143, Bank for International Settlements.
    3. Li, Hao & Guo, Hui & Hao, Xinyao & Zhang, Xuan, 2023. "The ESG rating, spillover of ESG ratings, and stock return: Evidence from Chinese listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Rating agency; Corporate social responsibility; Socially responsible investing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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