ESG rating disagreement and idiosyncratic return volatility: Evidence from China

• Published in: Research in international business and finance Vol. 70; p. 102368
• Main Authors: Liu, Xiangqiang, Yang, Qingqing, Wei, Kai, Dai, Peng-Fei
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2024
• Subjects: ESG rating disagreement; Idiosyncratic return volatility; Information asymmetry; Noise trading; Idiosyncratic return volatility; ESG rating disagreement; Information asymmetry; Noise trading
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2024.102368

Following the increasing importance of sustainable development and the popularity of ESG investing activities, ESG ratings have grown to be crucial references for investors’ decision-making. However, there are substantial disagreements among different rating agencies. This study examines the impact of ESG rating disagreement on idiosyncratic return volatility using data from five prominent rating agencies: SynTao Green Finance, Huazheng, Hexun, Bloomberg, and Rankins ESG Ratings. The findings suggest that ESG rating disagreement will increase idiosyncratic return volatility. This relation is driven by investor attention and noise trading. Heterogeneity tests reveal that the higher analyst coverage and greater analyst forecast bias, the more pronounced the impact of ESG rating disagreement on idiosyncratic return volatility. While firms with foreign investors and more institutional investors can alleviate the interference. •The increase in investor attention and noise trading is the channel through which ESG rating divergence affects idiosyncratic return volatility.•The higher analyst coverage and forecast error exacerbate the impact of ESG rating divergence. Meanwhile, QFII and institutional investors mitigate the negative effects of ESG rating divergence.•ESG rating disagreements have the negative impact on information efficiency.