The Determinants of ESG Ratings: Rater Ownership Matters

54 Pages Posted: 22 Jul 2021 Last revised: 6 Jun 2022

See all articles by Dragon Yongjun Tang

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Jiali Yan

University of Liverpool - Management School (ULMS)

Chelsea Yaqiong Yao

Lancaster University - Lancaster University Management School; New York University (NYU) - Leonard N. Stern School of Business

Date Written: June 6, 2022

Abstract

Environmental, social, and governance (ESG) ratings are widely used in practice but lack evidence of their underpinning. We find that firms sharing the same major shareholders with the rater (“sister firms”) receive higher ESG ratings. We make causal inference for the ownership effect by exploiting an acquisition event that created sister firms exogeneously. Sister firms receive higher ratings when the common owners have larger stakes in the ESG rater. Notwithstanding their initial higher ratings, sister firms have poorer future ESG outcomes. These findings cast doubt on the quality of ESG ratings and caution practitioners and regulators.

Keywords: ESG, Rating agencies, Conflicts of interest, Ownership structure

JEL Classification: G32, L32, M14

Suggested Citation

Tang, Dragon Yongjun and Yan, Jiali and Yao, Yaqiong, The Determinants of ESG Ratings: Rater Ownership Matters (June 6, 2022). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3889395 or http://dx.doi.org/10.2139/ssrn.3889395

Dragon Yongjun Tang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Jiali Yan

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Yaqiong Yao

Lancaster University - Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, LA1 4YX
United Kingdom

HOME PAGE: http://www.chelseayao.com

New York University (NYU) - Leonard N. Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY NY 10012
United States

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