The role of ESG rating divergence and independent directors in predicting future stock price crash risk

• Published in: Seonmul yeongu (Online) Vol. 33; no. 1; pp. 45 - 66
• Main Authors: Sun, Han, Lee, JaeHo, Kang, Hyoung-Goo, Fan, Zengrui
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Publishing Limited 25.03.2025; Emerald Group Publishing Limited; Emerald Publishing; 한국파생상품학회
• Subjects: Boards of directors; Corporate governance; Decision making; Environmental social & governance; ESG rating; Independent directors; Investments; Investors; Management decisions; Market reactions; Perceptions; Ratings & rankings; Securities markets; Stock performance; Stock prices; Transparency; Volatility; 경영학; China; ESG rating; Stock performance; Independent directors; Corporate governance; Market reactions
• ISSN: 1229-988X; 2713-6647; 2713-6647; 1229-988X
• DOI: 10.1108/JDQS-08-2024-0034

This study investigates the impact of ESG rating disagreements on stock performance in the Chinese A-share market, focusing on immediate and short-term market reactions and the risk of future stock price crashes. Using data from the Shanghai and Shenzhen stock exchanges, we analyze 17,006 firm-year observations from 2010 to 2021. Stock return data are sourced from the Wind database, while additional financial metrics are obtained from the China Stock Market and Accounting Research (CSMAR) database. Corporate governance information is drawn from the China National Research Data Service (CNRDS) database. Our findings indicate that higher levels of ESG divergence significantly increase the risk of future stock price crashes. Furthermore, the presence of independent directors moderates this relationship, reducing the likelihood of such crashes. Immediate market reactions to ESG rating disagreements are also significant, underscoring the need for transparency and alignment among rating agencies. The study highlights the importance of robust corporate governance and standardized ESG rating methodologies to mitigate associated risks. Policy recommendations include promoting transparency in ESG rating processes and enhancing the role of independent directors in corporate governance.