Economics Letters 231 (2023) 111268

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Economics Letters
journal homepage: www.elsevier.com/locate/ecolet

ESG rating disagreement, external attention and stock return:

Evidence from China
∗
Ruipeng Tan a , Lulu Pan b ,
a
School of Economics, Hefei University of Technology, Hefei, Anhui, China
b
The Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong

article info a b s t r a c t

Article history: Using a comprehensive dataset comprising various ratings on ESG performance of A-listed companies
Received 6 June 2023 in China, we find that ESG rating disagreement exerts a significantly negative influence on both
Received in revised form 18 July 2023 stock returns and volatility. External attention serves as a crucial moderating factor influencing the
Accepted 23 July 2023
relationship.
Available online 7 August 2023
© 2023 Elsevier B.V. All rights reserved.
JEL classification:
G24
G38

Keywords:
ESG rating disagreement
Stock returns
Volatility
External attention

1. Introduction measurement or further control industry by year fixed effects

The importance of environmental, social, and governance (ESG)
factors of companies, funds and portfolios in investment decisions
has received significant attention in the global financial markets
(Berg et al., 2022; Zhang et al., 2021). In stark contrast to the ac-
knowledged increasing importance of ESG factors in investment
decision-making, there exists substantial disagreement within
the current ESG rating systems (Widyawati, 2021; Chatterji et al.,
2009; Escrig-Olmedo et al., 2014), whose economic consequences
for publicly listed firms has not been systematically documented.
This paper investigates the relationship between ESG rating
disagreement and stock returns in the Chinese market, providing
new insights into the role of ESG ratings in an emerging economy
context. We first collect the ESG ratings of the A listed companies
in China from six mainstream rating agencies during 2010 to
2019. Then we measure the ESG rating disagreement using the
average standard deviation of pairwise percentile ranking across
all rater pairs and explore its impacts on the level and volatility
of stock return.
The findings show that ESG rating disagreement reduces both
the level and volatility of stock after controlling the stock and
year fixed effects. The results remain robust after we use the
ESG rating disagreement within each industry as the alternative
∗ Corresponding author.
E-mail address: lulupersonal@163.com (L. Pan).
in the specification. The heterogeneous analysis shows that the
external attention from analysts, media and public aggravates the
adverse effect, which is consistent with the view that ESG rating
disagreement conveys a negative signal to the investors and once
the bearish information transmits quickly through the crowd, it
affects the level and volatility of a company’s stock returns.
Overall, the paper contributes to the existing literature by
examining the impact of ESG rating disagreement on both the
level and volatility of stock return. There are two paper most
similar to ours, Anselmi and Petrella (2022) and Christensen
et al. (2022). We distinguish from them in the following three
aspects. First, we differ significantly in the specific measures of
ESG disagreement and the sample population. Specifically, we
select ESG ratings from six local and international institutions
given the availability of data and coverage of A-shares, and adopt
the measurement proposed by Avramov et al. (2022). Second, we
focus on volatility of stock return since it provides additional in-
sights into the risk and uncertainty associated with stock returns.
Last but not least, the paper focuses on Chinese market where the
structure, regulatory environment, foreign investor participation,
corporate governance and degree maturity are different from
those in Europe and the United States.
Second, we explore the reasons for the adverse effects of
ESG rating disagreement. Specifically, we investigate the role of
external attention in amplifying the adverse impact. Thus, we
shed light on the importance of external scrutiny and public
awareness in influencing market reactions. The finding highlights

https://doi.org/10.1016/j.econlet.2023.111268
0165-1765/© 2023 Elsevier B.V. All rights reserved.
R. Tan and L. Pan Economics Letters 231 (2023) 111268

the significance of reputation management and transparency in

mitigating the negative effects of ESG disagreement.
Table 1
Baseline results.
2. Data and methodology
(1) (2) (3) (4)

2.1. Data FRet FSigma

ESGdis −0.001*** −0.001** −0.004** −0.004**
Considering data availability, we use China listed firms from (−4.01) (−2.83) (−2.78) (−2.55)
2010 to 2019 as a sample and collect the ESG ratings from six Top1 0.005*** 0.005**
agencies: Hexun, Huazheng, SynTao Green Finance, Wind, RKS, (6.38) (2.39)
and Bloomberg to cover A-listed companies. Each agency provides Soe −0.023 0.151**
their own ESG rating for each firm. We end the research period (−0.62) (2.62)
at 2019 since we use the level and volatility of weekly return Size −0.239*** −0.257***
of the next year as the core dependent variable and stock price (−8.06) (−6.98)

volatility after 2020 may be affected by the outbreak of Covid-19. Management −0.070 −0.890**
(−0.46) (−2.19)
Then we remove firm-year data with missing values, and obtain
20,927 firm-year observations. Roe 0.010** 0.003
(2.39) (0.98)

2.2. Methodology Top4 0.094 −0.011

(1.72) (−0.08)

The regression equation we use in this paper is as follows: Board 0.007 −0.048
(0.13) (−0.28)
yi,t +1 = β0 + β1 ESGdisi,t + γ W it + δi + ρt + εit (1) Indep 0.167 0.276
(1.57) (0.81)
where the dependent variable yi,t +1 is the annual average level
Femboard −0.020 0.013
and volatility of weekly stock returns. We follow the measure-
(−0.32) (0.07)
ment of Avramov et al. (2022) to construct ESGdisi,t . We first
Growth 0.000 0.000
divide the ESG scores year by year into quartiles on the overall
(0.98) (1.33)
ranking, then calculate the standard deviation of pairwise per-
Risk 0.000*** 0.000***
centile ranking across all rater pairs. To denote the degree of ESG
(12.47) (21.73)
rating disagreement, we take the average standard deviation of
Tobinq −0.039*** −0.003
pairwise percentile ranking for each rater pair as the key inde- (−6.08) (−1.16)
pendent variable. We control for year fixed effects (ρt ) and firm
Constant 0.263*** 5.473*** 6.007*** 11.573***
fixed effects (δi ) to exclude confounding factors that are constant (37.54) (8.58) (236.50) (14.74)
across firms and across years. Standard errors are clustered at the
Firm FE Yes Yes Yes Yes
industry level. The definitions of variables and summary statistics Year FE Yes Yes Yes Yes
are presented Table A.1. Observations 14,534 14,534 14,534 14,534
R-squared 0.558 0.570 0.660 0.662
3. Results and discussions
Notes: *** p < 0.01; ** p < 0.05; *p < 0.1, t-values are in parentheses.

3.1. Baseline results

We present the estimates of the impacts of ESG rating dis-
agreement on the level and volatility of stock returns in Table 1.
After controlling for the firm and year fixed effects, ESG rating dis-
agreement reduces both the stock returns as well as its volatility.
When ESG rating disagreement increases by one unit, the stock
returns and volatility decrease by 0.001 units and 0.004 units,
respectively. Gibson Brandon et al. (2021) find that stock returns
of firms in S&P 500 index between 2010 and 2017 are positively
related to ESG rating disagreement, but they use the standard
deviation of the available ESG rating from the seven different data
providers for a given firm at a given point of time. Anselmi and
Petrella (2022) find that ESG rating has no impact on stock returns
for firms listed in Europe and the United States in the period
2010–2020. Compared to them, we get a different finding in the
context of China.
3.2. Robustness checks
Given that different industries tend to hold distinct prefer-
ences for ESG ratings and thus the variations in assessment of
ESG rating within the industry might matter more than the whole
ranking. We conduct two kinds of robustness checks. First, we
measure it of each firm within different industries to account for
the industry-specific factors instead of measuring the ESG rating
disagreement in the whole sample. Second, we control the fixed
effects of industry by year to eliminate the specific impacts of
different industries. The results remain robust in Table A.2.
2
3.3. The moderating effect of external attention
ESG rating disagreement would erode investor confidence,
leading to a negative perception of the company’s ESG perfor-
mance (Hu et al., 2023; Darnall et al., 2022). The growing external
attention makes it easier for information about ESG rating dis-
agreement to spread and become public knowledge, potentially
leading to a drop in the company’s stock price due to reduced de-
mand. Stock returns reflect the market sentiment and investors’
confidence. Therefore, those firms with more external attention
on its ESG rating disagreement may suffer more decline in stock
returns and volatility.
We use the number of analysts tracking the firm annually, the
total number of news that in the titles with the name of the firms
and Baidu Index to proxy for external attention from analysts,
media and public, respectively. Dum in Table 2 is an indicator
of whether the firm receive more attentions from analysts, me-
dia and the public respectively in columns (1)–(2), (3)–(4) and
(5)–(6). The coefficient of the interaction term (ESGdis*Dum) is
statistically significant at least at the 5% level except the column
(2). The results that show all the variables are in Table A3. In
general, the results indicate that ESG rating disagreement reduces
the level and volatility of stock returns more in firms that receive
more media and public attention.
R. Tan and L. Pan Economics Letters 231 (2023) 111268

Table 2
The moderating effect of external attention.
Dependent (1) (2) (3) (4) (5) (6)
variable FRet FSigma FRet FSigma FRet FSigma
ESGdis 0.000 −0.003* 0.001* −0.002 0.002** 0.002
(0.08) (−1.94) (1.96) (−1.38) (2.38) (0.68)
ESGdis*Dum −0.002** −0.002 −0.004*** −0.003*** −0.005*** −0.011**
(−2.54) (−0.73) (−4.75) (−2.98) (−3.71) (−2.87)
Controls Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes
Observations 14,055 14,055 13,384 13,384 13,535 13,535
R-squared 0.573 0.663 0.580 0.674 0.555 0.673

Notes: *** p < 0.01; ** p < 0.05; *p < 0.1, t-values are in parentheses.

4. Conclusions Appendix A. Supplementary data

Our findings suggest that ESG rating disagreement has ad-
verse effects on the level and volatility of stock returns. The
heterogeneous analysis shows that the adverse impact of ESG
rating disagreement on stock returns and volatility is larger in
firms receiving more attentions from the analysts, media and the
public.
Overall, the findings suggest that higher levels of rating dis-
agreement indicate increasing uncertainty and potential risks,
and thus promoting standardized reporting frameworks can con-
tribute to more accurate and consistent ESG ratings, providing a
more reliable foundation for investors and market participants.
Furthermore, the cross-national research into the disagree-
ment in ESG and their long-term impacts on corporate opera-
tional efficiency remains a fertile ground for future studies.
Data availability
Data will be made available on request.
Acknowledgments
This paper is funded by MOE (Ministry of Education in China)
Project of Humanities and Social Sciences (No. 22YJC790112) and
Fundamental Research Funds for the Central Universities, China
(No. JZ2022HGTA0352).
Supplementary material related to this article can be found
online at https://doi.org/10.1016/j.econlet.2023.111268.
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