The Determinants of ESG Ratings: Rater Ownership Matters

57 Pages Posted: 22 Jul 2021

See all articles by Dragon Yongjun Tang

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Jiali Yan

University of Liverpool - Management School (ULMS)

Chelsea Yaqiong Yao

Lancaster University - Lancaster University Management School; New York University (NYU) - Leonard N. Stern School of Business

Date Written: July 18, 2021

Abstract

Ratings on environmental, social, and governance (ESG) are largely obscure but have become widely used by investors. We show that firms held by the same owners as the rater (“sister firms”) receive higher ESG ratings. Exogenously created sister firms through acquisitions reveals causality for the common ownership effect. Sister firms receive higher ratings when the common owners have larger stakes in the ESG rater. Notwithstanding their higher initial ratings, sister firms have worse future ESG outcomes. These findings suggest that the quality of ESG ratings can be undermined by conflicts of interest and have important implication for practitioners and regulators.

Keywords: ESG, Rating agencies, Conflicts of interest, Ownership structure

JEL Classification: G32, L32, M14

Suggested Citation

Tang, Dragon Yongjun and Yan, Jiali and Yao, Yaqiong, The Determinants of ESG Ratings: Rater Ownership Matters (July 18, 2021). Available at SSRN: https://ssrn.com/abstract=3889395 or http://dx.doi.org/10.2139/ssrn.3889395

Dragon Yongjun Tang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

Jiali Yan

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Yaqiong Yao

Lancaster University - Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, LA1 4YX
United Kingdom

HOME PAGE: http://www.chelseayao.com

New York University (NYU) - Leonard N. Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY NY 10012
United States

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