Corporate ESG rating divergence and excess stock returns

ESG rating have progressively become an important reference index within the investment decision-making process. However, divergence might arise among diverse ESG rating agencies when appraising the same company. Such divergence affects investors' perception of a companies' ESG performance, consequently affecting its excess stock returns. This paper delves into the mechanics behind ESG rating divergence on excess stock returns based on the ESG rating data encompassing Shanghai and Shenzhen A-share listed companies in China spanning from 2018 to 2022. The research reveals the following findings: Firstly, ESG rating divergence negatively impact stock excess return rates. Investor sentiment, ESG improvement potential and information transparency play a positive moderating role in the influence of ESG rating divergence on excess stock returns. Secondly, there are heterogeneity characteristics in the impact of ESG rating divergence on excess stock returns. Companies that actively disclose ESG reports, low-carbon companies, companies with QFII, and those with high divergence and high rating experience a greater impact form ESG rating divergence on their excess stock returns. Thirdly, the social rating divergence has the greatest impact on excess stock returns, followed by environmental and governance levels. •ESG rating divergence negatively impact stock excess return rates.•Investor sentiment, ESG improvement potential and information transparency play a positive moderating role.•The social rating divergence has the greatest impact on excess stock returns.