ESG ratings inconsistency and its effects on information in capital market

Jiarong Li, Xingzi Ren, Nan Yang and Zhen Xu

China Accounting and Finance Review, 2025, vol. 28, issue 1, 117-140

Abstract: PurposeThis study explores how inconsistency in environmental, social and governance (ESG) ratings affects the information environment of publicly traded companies in emerging markets.Design/methodology/approachDrawing on data from six ESG rating agencies covering listed Chinese firms from 2010 to 2022, we construct measures of pairwise ESG rating divergence and average them across 15 unique rater pairs. We then employ a battery of econometric methods to examine how inconsistencies in ESG ratings affect stock return synchronicity in the Chinese capital market.FindingsOur findings indicate that greater ESG rating divergence correlates with increased stock return synchronicity, suggesting a decline in the dissemination of firm-specific information. Supporting evidence for this relationship includes reduced private information flow, heightened opportunistic executive sales and decreased stock turnover for firms associated with higher ESG rating divergence. Our analysis suggests that such divergence hinders informed trading by institutional investors and the effect is more pronounced for firms with lower transparency, such as those with fewer analysts, limited investor oversight and sparse ESG disclosure, as well as for firms in non-polluting industries. These findings emphasize that ESG rating divergence exacerbates uncertainty about firms’ future performance, discourages informed trading and ultimately restricts the integration of firm-specific information into stock prices.Originality/valueThis study adds to the literature on ESG ratings and market efficiency by highlighting the importance of standardizing rating methodologies and improving corporate disclosure to counteract the adverse impacts of rating divergence.

Keywords: ESG rating inconsistency; Uncertainty; Firm information environment (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cafrpp:cafr-08-2025-0200

DOI: 10.1108/CAFR-08-2025-0200

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