ESG Rating Divergence and Stock Mispricing
DOI:
https://doi.org/10.54097/zmk2f350Keywords:
ESG rating divergence; stock mispricing; institutional investors.Abstract
With the development and popularization of the concept of sustainable development, more and more investors have begun to use corporate ESG performance to measure the long-term development ability of enterprises, but due to the existence of different evaluation systems among different rating agencies, which has led to the emergence of ESG rating divergence. Against the background of widespread ESG rating divergence, this paper aims to investigate the impact of ESG rating divergence on the level of stock mispricing in the capital market. Through empirical research, it is found that, first, the greater the corporate ESG rating divergence, the greater the level of stock mispricing; second, this paper examines the path of the impact of ESG rating divergence on the level of stock mispricing. The findings show that the expansion of ESG rating divergence promotes the stock mispricing level by reducing the rational investor-institutional investor shareholding path. Meanwhile, when the nature of corporate ownership is state-owned enterprises, the more depressed investor sentiment, and the worse corporate ESG performance, the stronger and more significant the contribution of ESG rating divergence to the level of stock mispricing. Finally, this paper demonstrates the robustness of the research findings by the method of replacing the evaluation indicators of ESG rating divergence and stock mispricing level. This study not only confirms the negative impact of ESG rating divergence on the capital market, but also provides ways and means to improve the pricing efficiency of the capital market.
Downloads
References
[1] Avramov D, Cheng S, Lioui A, et al. Investment and Asset Pricing with ESG Disagreement[J]. Social Science Electronic Publishing, 2020.
[2] Avramov D, Cheng S, Lioui A, et al. Sustainable investing with ESG rating uncertainty [J]. Journal of financial economics, 2022, 145(2):642-664.
[3] Berg F, Koelbel J F, Rigobon R. Aggregate confusion: the divergence of ESG ratings [J]. Review of finance, 2022, 26 (6): 1315-1344.
[4] Chava, S. Environmental Externalities and Cost of Capital. SSRN Electronic Journal, 2011.
[5] Christensen D M,Serafeim G, Sikochi A. Why is corporate virtue in the eye of the beholder? the case of ESG ratings[J]. The accounting review, 2022, 97(1):147-175.
[6] Du, S., Bhattacharya, C. B., & Sen, S. Maximizing Business Returns to Corporate Social Responsibility (CSR): The Role of CSR Communication. International Journal of Management Reviews, 2010, 12(1), 8–19.
[7] Dunn, J., Fitzgibbons, S., Pomorski, L. Assessing risk through environmental, social and governance exposures. Journal of Investment Management, 2018, 16 (1), 4–17.
[8] Edward, M, Miller. Risk, Uncertainty, and Divergence of Opinion [J]. Journal of Finance, 1997.
[9] Gregory, A., Tharyan, R., & Whittaker, J. Corporate Social Responsibility and Firm Value: Disaggregating the Effects on Cash Flow, Risk and Growth. Journal of Business Ethics, 2013, 124(4), 633–657.
[10] Giese, Guido, Lee, Linda-Eling, Melas, Dimitris, Nagy, Zoltan, Nishikawa, Laura. Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance [J]. The Journal of Portfolio Management, 2019, 45(5):69-83
[11] Hong H, Stein J C. Disagreement and the stock market [J]. Journal of Economic perspectives, 2007, 21(2): 109-128.
[12] HOPE, O.-K., & THOMAS, W. B. Managerial Empire Building and Firm Disclosure. Journal of Accounting Research, 2008, 46(3), 591–626.
[13] Jin L, Myers S C. R2 around the world: New theory and new tests [J]. Journal of Financial Economics, 2006, 79.
[14] Krueger, P. Corporate Goodness and Shareholder Wealth. SSRN Electronic Journal, 2013.
[15] Lee, J. Information asymmetry, mispricing, and security issuance[J]. The Journal of Finance, 2021, 76(6): 3401-3446.
[16] Liu, C. L., and Y. M. Lin. Do mispricing and financial constraints matter for investment decisions? [J]. Applied Economics, 2018, 50(54): 5877-5892.
[17] Marshall, S., Brown, D., & Plumlee, M. The Impact of Voluntary Environmental Disclosure Quality on Firm Value. Academy of Management Proceedings, 2009(1), 1–6.
[18] Sakaki, H., S. Jory, and D. Jackson. Institutional investors’ ownership stability and their investee firms’ equity mispricing[J]. The North American Journal of Economics and Finance, 2021, 57: 101440.
[19] Serafeimg, Yoona. Stock price reactions to ESG news: the role of ESG ratings and disagreement [J].Review of accounting studies, 2022.
[20] Sulaeman, J., and K. D. Wei. Sell-side analysts and stock mispricing: evidence from mutual fund flow-driven trading pressure[J]. Management Science, 2019, 65(11): 5427-5448.
[21] Xing, H., H. Wang, F. Cheng, et al. Mispricing: failure to capture the risk preferences dependent on market states[J]. Annals of Operations Research, 2021: 1-26.
[22] Yang, B., T. Ye, and Y. Ma. Financing anomaly, mispricing and cross-sectional return predictability[J]. International Review of Economics & Finance, 2022, 79: 579-598.
Downloads
Published
Issue
Section
License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.