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ESG Rating Disagreement and Stock Returns

Rajna Gibson, Philipp Krueger, Nadine Riand and Peter Steffen Schmidt
Additional contact information
Rajna Gibson: University of Geneva - Geneva Finance Research Institute (GFRI)
Nadine Riand: University of Geneva - Geneva Finance Research Institute
Peter Steffen Schmidt: University of Zurich - Department of Banking and Finance; University of Geneva - Geneva Finance Research Institute (GFRI)

No 19-67, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: 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.

Keywords: Disagreement; non-financial information; ESG ratings dispersion; heterogeneous beliefs; stock returns; legal origins; sustainable finance (search for similar items in EconPapers)
Pages: 40 pages
Date: 2019-08
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Citations: View citations in EconPapers (9)

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