The impact of ESG rating disagreement on corporate value

Abstract

The authors examine the effect of split environmental, social and governance (ESG) ratings on information asymmetry, corporate value and trading behavior. The authors test the risk-based hypothesis and the optimism-bias hypothesis on the relationship between diverging opinions and future stock prices. The authors results show that split ESG ratings is positively related to idiosyncratic volatility, an alternative measure for information asymmetry. Further, the negative effect of split ESG ratings on cumulative abnormal return under short-selling constraints is consistent with the optimism bias hypothesis. The authors find a negative relationship between split ESG ratings and the net purchase ratio (NPR) of pension funds. Considering that the NPR is a direct measure of net demand, ESG disagreement may hinder socially responsible investing (SRI) in a firm. This study directly demonstrates the negative effect of ESG disagreement on firm value and investment by Korea's National Pension Service (NPS). The results offer valuable insights into policymakers, as the wide divergence in ESG ratings requires urgent attention to expand SRI.