ESG Rating Disagreement and Stock Returns
31 Pages Posted: 10 Aug 2019 Last revised: 17 Aug 2019
Date Written: August 6, 2019
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
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