Abstract
We investigate whether environmental, social, and governance (ESG) ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. The relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens, while the rating with the most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value-relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1500-1530 |
| Number of pages | 31 |
| Journal | Review of Accounting Studies |
| Volume | 28 |
| Issue number | 3 |
| DOIs | |
| State | Published - Sep 2023 |
Funding
We thank Ulrich Atz (discussant), Sadok El Ghoul (discussant), Caroline Flammer, Soohun Kim, Marie Lambert (discussant), Zengquan Li, You-il (Chris) Park (discussant), and seminar participants at Accounting Summer Camp, 4th Annual GRASFI Conference, 19th Annual Corporate Finance Day Conference, International Workshop on Financial System Architecture & Stability, KAIST, Korea Securities Association, Northern Finance Association, Pan Agora Asset Management, Singapore Management University, TruValue Labs ESG Conference, UMASS-EMN Conference, and UN PRI Academic Week 2021 Conference for helpful comments. We are also sincerely grateful to Florian Berg, Julian Koebel, and Roberto Rigobon for sharing their divergence data in the Aggregate Confusion project. This paper received the Crowell Memorial Prize for the best paper on quantitative investing from Pan Agora Asset Management. George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School. Aaron Yoon is an assistant professor at Kellogg School of Management at Northwestern University. Serafeim is grateful for financial support from the Division of Faculty Research and Development at Harvard Business School. We are grateful to TruValue Labs and Sustainalytics for providing access to their ESG data. All errors are our sole responsibility. We thank Ulrich Atz (discussant), Sadok El Ghoul (discussant), Caroline Flammer, Soohun Kim, Marie Lambert (discussant), Zengquan Li, You-il (Chris) Park (discussant), and seminar participants at Accounting Summer Camp, 4th Annual GRASFI Conference, 19th Annual Corporate Finance Day Conference, International Workshop on Financial System Architecture & Stability, KAIST, Korea Securities Association, Northern Finance Association, Pan Agora Asset Management, Singapore Management University, TruValue Labs ESG Conference, UMASS-EMN Conference, and UN PRI Academic Week 2021 Conference for helpful comments. We are also sincerely grateful to Florian Berg, Julian Koebel, and Roberto Rigobon for sharing their divergence data in the Aggregate Confusion project. This paper received the Crowell Memorial Prize for the best paper on quantitative investing from Pan Agora Asset Management. George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School. Aaron Yoon is an assistant professor at Kellogg School of Management at Northwestern University. Serafeim is grateful for financial support from the Division of Faculty Research and Development at Harvard Business School. We are grateful to TruValue Labs and Sustainalytics for providing access to their ESG data. All errors are our sole responsibility.
Keywords
- ESG news
- ESG rating
- Market reaction
- Ratings disagreement
ASJC Scopus subject areas
- Accounting
- General Business, Management and Accounting