ESG Rating Disagreement and Stock Returns

44 Pages Posted: 10 Aug 2019 Last revised: 20 Jan 2020

See all articles by Rajna Gibson

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI)

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

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)

Date Written: December 22, 2019

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

Suggested Citation

Gibson, Rajna and Krueger, Philipp and Riand, Nadine and Schmidt, Peter Steffen, ESG Rating Disagreement and Stock Returns (December 22, 2019). Swiss Finance Institute Research Paper No. 19-67; European Corporate Governance Institute – Finance Working Paper No. 651/2020. Available at SSRN: https://ssrn.com/abstract=3433728 or http://dx.doi.org/10.2139/ssrn.3433728

Rajna Gibson

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41.22.379.89.83 (Phone)

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute ( email )

Switzerland

Nadine Riand

University of Geneva - Geneva Finance Research Institute ( email )

Uni Pignon
Du-Bois-Melly
Geneva, Geneva 1205
Switzerland

Peter Steffen Schmidt (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

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