This document summarizes a study that examines the relationship between ESG rating disagreement and stock returns in China. The study finds:
1) ESG rating disagreement has a significantly negative influence on both stock returns and volatility after controlling for stock and year fixed effects.
2) External attention from analysts, media, and the public exacerbates the adverse effect of ESG rating disagreement on stock returns and volatility.
3) The results provide new insights into how ESG ratings can impact stock performance in an emerging economy like China and highlight the importance of reputation management and transparency.
This document summarizes a study that examines the relationship between ESG rating disagreement and stock returns in China. The study finds:
1) ESG rating disagreement has a significantly negative influence on both stock returns and volatility after controlling for stock and year fixed effects.
2) External attention from analysts, media, and the public exacerbates the adverse effect of ESG rating disagreement on stock returns and volatility.
3) The results provide new insights into how ESG ratings can impact stock performance in an emerging economy like China and highlight the importance of reputation management and transparency.
This document summarizes a study that examines the relationship between ESG rating disagreement and stock returns in China. The study finds:
1) ESG rating disagreement has a significantly negative influence on both stock returns and volatility after controlling for stock and year fixed effects.
2) External attention from analysts, media, and the public exacerbates the adverse effect of ESG rating disagreement on stock returns and volatility.
3) The results provide new insights into how ESG ratings can impact stock performance in an emerging economy like China and highlight the importance of reputation management and transparency.
This document summarizes a study that examines the relationship between ESG rating disagreement and stock returns in China. The study finds:
1) ESG rating disagreement has a significantly negative influence on both stock returns and volatility after controlling for stock and year fixed effects.
2) External attention from analysts, media, and the public exacerbates the adverse effect of ESG rating disagreement on stock returns and volatility.
3) The results provide new insights into how ESG ratings can impact stock performance in an emerging economy like China and highlight the importance of reputation management and transparency.
ESG rating disagreement, external attention and stock return:
Evidence from China ∗ Ruipeng Tan a , Lulu Pan b , a School of Economics, Hefei University of Technology, Hefei, Anhui, China b The Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong
1. Introduction measurement or further control industry by year fixed effects
in the specification. The heterogeneous analysis shows that the The importance of environmental, social, and governance (ESG) external attention from analysts, media and public aggravates the factors of companies, funds and portfolios in investment decisions adverse effect, which is consistent with the view that ESG rating has received significant attention in the global financial markets disagreement conveys a negative signal to the investors and once (Berg et al., 2022; Zhang et al., 2021). In stark contrast to the ac- the bearish information transmits quickly through the crowd, it knowledged increasing importance of ESG factors in investment affects the level and volatility of a company’s stock returns. decision-making, there exists substantial disagreement within Overall, the paper contributes to the existing literature by the current ESG rating systems (Widyawati, 2021; Chatterji et al., examining the impact of ESG rating disagreement on both the 2009; Escrig-Olmedo et al., 2014), whose economic consequences level and volatility of stock return. There are two paper most for publicly listed firms has not been systematically documented. similar to ours, Anselmi and Petrella (2022) and Christensen This paper investigates the relationship between ESG rating et al. (2022). We distinguish from them in the following three disagreement and stock returns in the Chinese market, providing aspects. First, we differ significantly in the specific measures of ESG disagreement and the sample population. Specifically, we new insights into the role of ESG ratings in an emerging economy select ESG ratings from six local and international institutions context. We first collect the ESG ratings of the A listed companies given the availability of data and coverage of A-shares, and adopt in China from six mainstream rating agencies during 2010 to the measurement proposed by Avramov et al. (2022). Second, we 2019. Then we measure the ESG rating disagreement using the focus on volatility of stock return since it provides additional in- average standard deviation of pairwise percentile ranking across sights into the risk and uncertainty associated with stock returns. all rater pairs and explore its impacts on the level and volatility Last but not least, the paper focuses on Chinese market where the of stock return. structure, regulatory environment, foreign investor participation, The findings show that ESG rating disagreement reduces both corporate governance and degree maturity are different from the level and volatility of stock after controlling the stock and those in Europe and the United States. year fixed effects. The results remain robust after we use the Second, we explore the reasons for the adverse effects of ESG rating disagreement within each industry as the alternative ESG rating disagreement. Specifically, we investigate the role of external attention in amplifying the adverse impact. Thus, we ∗ Corresponding author. shed light on the importance of external scrutiny and public E-mail address: lulupersonal@163.com (L. Pan). awareness in influencing market reactions. The finding highlights
the significance of reputation management and transparency in
mitigating the negative effects of ESG disagreement. Table 1 Baseline results. 2. Data and methodology (1) (2) (3) (4)
2.1. Data FRet FSigma
ESGdis −0.001*** −0.001** −0.004** −0.004** Considering data availability, we use China listed firms from (−4.01) (−2.83) (−2.78) (−2.55) 2010 to 2019 as a sample and collect the ESG ratings from six Top1 0.005*** 0.005** agencies: Hexun, Huazheng, SynTao Green Finance, Wind, RKS, (6.38) (2.39) and Bloomberg to cover A-listed companies. Each agency provides Soe −0.023 0.151** their own ESG rating for each firm. We end the research period (−0.62) (2.62) at 2019 since we use the level and volatility of weekly return Size −0.239*** −0.257*** of the next year as the core dependent variable and stock price (−8.06) (−6.98)
volatility after 2020 may be affected by the outbreak of Covid-19. Management −0.070 −0.890** (−0.46) (−2.19) Then we remove firm-year data with missing values, and obtain 20,927 firm-year observations. Roe 0.010** 0.003 (2.39) (0.98)
2.2. Methodology Top4 0.094 −0.011
(1.72) (−0.08)
The regression equation we use in this paper is as follows: Board 0.007 −0.048 (0.13) (−0.28) yi,t +1 = β0 + β1 ESGdisi,t + γ W it + δi + ρt + εit (1) Indep 0.167 0.276 (1.57) (0.81) where the dependent variable yi,t +1 is the annual average level Femboard −0.020 0.013 and volatility of weekly stock returns. We follow the measure- (−0.32) (0.07) ment of Avramov et al. (2022) to construct ESGdisi,t . We first Growth 0.000 0.000 divide the ESG scores year by year into quartiles on the overall (0.98) (1.33) ranking, then calculate the standard deviation of pairwise per- Risk 0.000*** 0.000*** centile ranking across all rater pairs. To denote the degree of ESG (12.47) (21.73) rating disagreement, we take the average standard deviation of Tobinq −0.039*** −0.003 pairwise percentile ranking for each rater pair as the key inde- (−6.08) (−1.16) pendent variable. We control for year fixed effects (ρt ) and firm Constant 0.263*** 5.473*** 6.007*** 11.573*** fixed effects (δi ) to exclude confounding factors that are constant (37.54) (8.58) (236.50) (14.74) across firms and across years. Standard errors are clustered at the Firm FE Yes Yes Yes Yes industry level. The definitions of variables and summary statistics Year FE Yes Yes Yes Yes are presented Table A.1. Observations 14,534 14,534 14,534 14,534 R-squared 0.558 0.570 0.660 0.662 3. Results and discussions Notes: *** p < 0.01; ** p < 0.05; *p < 0.1, t-values are in parentheses.
3.1. Baseline results
We present the estimates of the impacts of ESG rating dis- 3.3. The moderating effect of external attention agreement on the level and volatility of stock returns in Table 1. After controlling for the firm and year fixed effects, ESG rating dis- agreement reduces both the stock returns as well as its volatility. ESG rating disagreement would erode investor confidence, When ESG rating disagreement increases by one unit, the stock leading to a negative perception of the company’s ESG perfor- returns and volatility decrease by 0.001 units and 0.004 units, mance (Hu et al., 2023; Darnall et al., 2022). The growing external respectively. Gibson Brandon et al. (2021) find that stock returns attention makes it easier for information about ESG rating dis- of firms in S&P 500 index between 2010 and 2017 are positively agreement to spread and become public knowledge, potentially related to ESG rating disagreement, but they use the standard leading to a drop in the company’s stock price due to reduced de- deviation of the available ESG rating from the seven different data mand. Stock returns reflect the market sentiment and investors’ providers for a given firm at a given point of time. Anselmi and confidence. Therefore, those firms with more external attention Petrella (2022) find that ESG rating has no impact on stock returns for firms listed in Europe and the United States in the period on its ESG rating disagreement may suffer more decline in stock 2010–2020. Compared to them, we get a different finding in the returns and volatility. context of China. We use the number of analysts tracking the firm annually, the total number of news that in the titles with the name of the firms 3.2. Robustness checks and Baidu Index to proxy for external attention from analysts, media and public, respectively. Dum in Table 2 is an indicator Given that different industries tend to hold distinct prefer- of whether the firm receive more attentions from analysts, me- ences for ESG ratings and thus the variations in assessment of dia and the public respectively in columns (1)–(2), (3)–(4) and ESG rating within the industry might matter more than the whole (5)–(6). The coefficient of the interaction term (ESGdis*Dum) is ranking. We conduct two kinds of robustness checks. First, we measure it of each firm within different industries to account for statistically significant at least at the 5% level except the column the industry-specific factors instead of measuring the ESG rating (2). The results that show all the variables are in Table A3. In disagreement in the whole sample. Second, we control the fixed general, the results indicate that ESG rating disagreement reduces effects of industry by year to eliminate the specific impacts of the level and volatility of stock returns more in firms that receive different industries. The results remain robust in Table A.2. more media and public attention. 2 R. Tan and L. Pan Economics Letters 231 (2023) 111268
Notes: *** p < 0.01; ** p < 0.05; *p < 0.1, t-values are in parentheses.
4. Conclusions Appendix A. Supplementary data
Our findings suggest that ESG rating disagreement has ad- Supplementary material related to this article can be found verse effects on the level and volatility of stock returns. The online at https://doi.org/10.1016/j.econlet.2023.111268. heterogeneous analysis shows that the adverse impact of ESG rating disagreement on stock returns and volatility is larger in References firms receiving more attentions from the analysts, media and the public. Anselmi, G., Petrella, G., 2022. ESG ratings: Disagreement across providers and effects on stock returns. Available at SSRN 4328468. Overall, the findings suggest that higher levels of rating dis- Avramov, D., Cheng, S., Lioui, A., et al., 2022. Sustainable investing with ESG agreement indicate increasing uncertainty and potential risks, rating uncertainty. J. Financ. Econ. 145 (2), 642–664. and thus promoting standardized reporting frameworks can con- Berg, F., Koelbel, J.F., Rigobon, R., 2022. Aggregate confusion: The divergence of tribute to more accurate and consistent ESG ratings, providing a ESG ratings. Rev. Finance 26 (6), 1315–1344. Brandon, R.Gibson., Krueger, P., Schmidt, P.S., 2021. ESG rating disagreement and more reliable foundation for investors and market participants. stock returns. Financ. Anal. J. 77 (4), 104–127. Furthermore, the cross-national research into the disagree- Chatterji, A.K., Levine, D.I., Toffel, M.W., 2009. How well do social ratings actually ment in ESG and their long-term impacts on corporate opera- measure corporate social responsibility? J. Econ. Manag. Strategy 18 (1), tional efficiency remains a fertile ground for future studies. 125–169. Christensen, D.M., Serafeim, G., Sikochi, A., 2022. Why is corporate virtue in the eye of the beholder? The case of ESG ratings. Account. Rev. 97 (1), 147–175. Data availability Darnall, N., Ji, H., Iwata, K., et al., 2022. Do ESG reporting guidelines and verifications enhance firms’ information disclosure? Corp. Soc. Responsibil. Environ. Manag. 29 (5), 1214–1230. Data will be made available on request. Escrig-Olmedo, E., Muñoz-Torres, M.J., Fernández-Izquierdo, M.Á., et al., 2014. Lights and shadows on sustainability rating scoring. Rev. Manag. Sci. 8, 559–574. Acknowledgments Hu, X., Hua, R., Liu, Q., et al., 2023. The green fog: Environmental rat- ing disagreement and corporate greenwashing. Pacific-Basin Finance J. 78, This paper is funded by MOE (Ministry of Education in China) 101952. Project of Humanities and Social Sciences (No. 22YJC790112) and Widyawati, L., 2021. Measurement concerns and agreement of environmental social governance ratings. Account. Finance 61, 1589–1623. Fundamental Research Funds for the Central Universities, China Zhang, X., Zhao, X., Qu, L., 2021. Do green policies catalyze green investment? (No. JZ2022HGTA0352). Evidence from ESG investing developments in China. Econ. Lett. 207, 110028.
