ESG Rating Disagreement and Stock Returns

31 Pages Posted: 10 Aug 2019 Last revised: 17 Aug 2019

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: August 6, 2019

Abstract

Using a sample of S&P 500 firms between 2013 and 2017, we examine the stock return implications of ESG rating disagreement. We start by documenting that the average correlation between ESG ratings from six prominent rating providers is about 0.45. Surprisingly, the average correlation is lowest for the governance, and highest for the environmental dimension. We also find that disagreement is higher for larger, less profitable, and firms without a credit rating. We then classify ESG rating providers by the legal origin of the countries in which they are headquartered. Given the more stakeholdercentric model of the firm that is typically found in civil law countries, we hypothesize that disagreement about social ratings among rating providers with a civil law origin is more relevant and should strongly influence stock returns. In a similar spirit, the shareholder primacy of common law countries suggests that disagreement about governance issues among ratings providers with a common law origin should also impact returns.

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 (August 6, 2019). 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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