ESG Rating Score Revisions and Stock Returns

62 Pages Posted: 24 Sep 2022 Last revised: 28 Mar 2023

See all articles by Rients Galema

Rients Galema

Utrecht University - School of Economics

Dirk Gerritsen

Utrecht University - School of Economics

Date Written: March 24, 2023

Abstract

We analyze the impact of ESG rating score revisions on stock returns for U.S.-listed firms. We find that it takes the market multiple months to reflect revisions. Using holding periods of six months, decreases in ratings are followed by annualized negative abnormal returns of approximately 3%. Our results appear to be mostly driven by decreases in the Environment rating. Specifically for the Environment rating, we find three channels that are congruent with our findings. First, institutional investors decrease their holdings after a decrease in ratings. Second, sustainable index revisions are a channel through which rating revisions affect returns. Third, rating downgrades are followed by increases in systematic risk. Our results suggest that ESG rating revisions are relevant for firm valuations.

Keywords: ESG, Environment, Ratings, Event study

JEL Classification: M14, G14, D21, L21

Suggested Citation

Galema, Rients and Gerritsen, Dirk, ESG Rating Score Revisions and Stock Returns (March 24, 2023). Available at SSRN: https://ssrn.com/abstract=4218969 or http://dx.doi.org/10.2139/ssrn.4218969

Rients Galema

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Dirk Gerritsen (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

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