Do ESG ratings improve capital market trading activities?

Chunqiang Zhang, Dayu Hao, Lu Gao, Fan Xia and Linlang Zhang

International Review of Economics & Finance, 2024, vol. 93, issue PA, 195-210

Abstract: While ESG (Environmental, Social, and Governance) ratings provide an assessment of a firm's sustainable performance, the exact influence of these ratings on stock liquidity remains uncertain. Using listed Chinese A-share firms from 2016 to 2021, we find that ESG ratings improve stock liquidity, and the results are robust after employing alternative measures of ESG rating and liquidity and accounting for endogeneity. Mechanism tests demonstrate that ESG ratings attract market attention, proxied by institutional shareholdings, analysts' followings, and online comments by investors, and enhance corporate transparency, proxied by transparency grades and discretionary accruals, thereby improving stock liquidity. Cross-sectional tests results suggest that when information demand from investors is high, such as strong environmental monitoring, lower-level disclosure of CSR, and lower corporate governance, ESG ratings present a more significant information effect on stock liquidity. Moreover, utilizing COVID-19 as a quasi-natural shock, further analysis reveals that the coronavirus pandemic amplifies the relationship between ESG rating and stock liquidity. Our results contribute to the ongoing debate regarding whether ESG ratings can benefit shareholders by illustrating the positive consequence of ESG ratings on stock market performance.

Keywords: ESG ratings; Stock liquidity; Market attention; Information transparency (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pa:p:195-210

DOI: 10.1016/j.iref.2024.03.027

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