ESG Rating Score Revisions and Stock Returns
1 Pages Posted: 6 Apr 2024
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ESG Rating Changes and Stock Returns
Abstract
We analyze the impact of ESG rating score revisions on stock returns for U.S.-listed firms. Consistent with ESG’s importance for long-term value, we find that stock prices adjust during a prolonged period of time due to long-term investors. Specifically, 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 Environmental rating. Specifically for this E rating, we find three mechanisms that are congruent with our findings. First, part of the returns can be explained by sustainable index revisions following rating revisions. Second, long-term institutional investors decrease their holdings after a decrease in ratings. Third, rating downgrades are followed by increases in risk. Our results suggest that ESG rating revisions are relevant for firm valuations.
Keywords: ESG, Environmental, Ratings, Institutional Investors, Sustainable Index
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