ESG rating disagreement and stock returns: Evidence from China

Environmental, social, and governance (ESG) ratings are receiving increasing attention in the financial market. However, ESG rating disagreement creates a barrier to ESG investment. This study explores empirically how ESG rating disagreement affects the Chinese capital market based on rating data from six agencies. The results show that ESG rating disagreement has a significant negative impact on stock returns. Mechanism analysis indicates that ESG rating disagreement can lead to decreased investor sentiment and, subsequently, a drop in stock returns. Heterogeneity analysis reveals that this negative impact is more pronounced in non-state-owned enterprises, companies with higher average ESG ratings, and those with fewer institutional investors. Moreover, the governance dimension is the crucial factor driving the drop in stock returns. Therefore, investors and decision makers should consider comprehensive information from multiple agencies when assessing ESG ratings to help mitigate decision bias.