As many ESG rating agencies have flourished to meet rising interests in ESG investing, we examine the information provider role of these rating agencies. We hypothesize that new ratings can add information useful to investors about rated firms besides any changes to the average level and dispersion in ratings. We exploited the empirical setting where the introduction of various ESG ratings in China is staggered over time and across firms. We show that an increase in the number of ratings by different agencies for a given firm will induce more mutual funds’ investments towards that firm. This is unexplained by rating inflation or rating shopping channels. We further show that such effect is more pronounced when incumbent and entrant agents provide complementary information. For different types of funds, we find different sensitivities to the arrival of new agents in accordance with their explicit requirements for ESG mandate. And interestingly ESG funds that track ESG indices are not responsive to new ratings as ESG indices are sticky in choosing the reference rating. We also provide evidence that the documented effects are not due to endogenous actions taken by incumbent agencies or the firms. Our paper provides interesting and causal evidence of the incremental information from additional ESG ratings which have important implications for the market competition and regulations of ESG rating agencies.

This paper creates default-probability-(PD)-implied credit ratings for Chinese firms following the S&P global rating standard. The domestic credit rating agency (DCRA) ratings are higher than the PD-implied ratings by ten notches on average for the identical level of default risk, implying that the domestic ratings are significantly inflated. The PD-implied ratings outperform the DCRA ratings in detecting defaults and complement the latter in predicting yield spreads. The PD-implied ratings draw information from operating efficiency-related variables; in contrast, the DCRA ratings pay attention to scale-based firm characteristics in credit risk assessment.

We provide the first direct evidence on how issuers choose a credit rating agency (CRA). Using rating data from a leading CRA in China, we find that although in most cases the issuers publish more favourable ratings, in some cases issuers just select the ratings provided by CRAs they have business relationships with, especially when the more favourable ratings are above issuers’ prior ratings. Our further analysis suggests that this phenomenon is driven by the switching cost arising from the issuer being considered as a rating shopper when it obtains an upgrade from a CRA without a business relationship.