ESG Rating Disagreement and Stock Returns

Using a sample of S&P 500 firms between 2013 and 2017, we study the impact of ESG rating disagreement on stock returns. Building on the heterogeneous beliefs literature, we conjecture that for disagreement about environmental ratings, a risk–based explanation induces a positive relationship between disagreement and stock returns. In contrast, we hypothesize that for disagreement about the social and the governance dimension, the impact on stock returns is driven by mispricing considerations and also depends on whether the disagreeing rating providers are located in civil or common law jurisdictions. The idea is that civil (common) law rating providers are more apt at identifying material social (governance) information, and that disagreement by such rating providers results in overvaluation and thus lower subsequent stock returns. Our empirical findings support these hypotheses.