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Why Is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings

By: Dane Christensen, George Serafeim and Anywhere Sikochi
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Abstract

Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. As what drives this disagreement is unclear, we examine whether a firm’s ESG disclosure helps explain some of this disagreement. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. These findings hold using firm fixed effects, and using a difference-in-differences design with mandatory ESG disclosure shocks. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Lastly, we examine consequences of ESG disagreement and find that greater ESG disagreement is associated with higher return volatility, larger absolute price movements, and a lower likelihood of issuing external financing. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it.

Keywords

Esg Ratings; Rating Agency Disagreement; Esg Disclosure; Corporate Social Responsibility; Sustainability; Corporate Social Responsibility And Impact; Environmental Sustainability; Corporate Disclosure

Citation

Christensen, Dane, George Serafeim, and Anywhere Sikochi. "Why Is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings." Accounting Review (forthcoming).

Supplemental Information

Why is Corporate Virtue in the Eye of The Beholder - The Case of ESG Ratings
Online Appendix
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About The Authors

George Serafeim

Accounting and Management
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Anywhere Sikochi

Accounting and Management
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More from the Authors
  • Accounting for Product Impact in the Telecommunications Industry By: George Serafeim and Katie Trinh
  • Accounting for Product Impact in the Water Utilities Industry By: George Serafeim and Katie Trinh
  • Facebook’s Libra (B): The Privatization of Money? By: Marco Di Maggio, Ethan Rouen, George Serafeim and Amy Klopfenstein
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