Purpose-This study explores how inconsistency in environmental, social and governance (ESG) ratings affects the information environment of publicly traded companies in emerging markets. Design/methodology/approach-Drawing on data from six ESG rating agencies covering listed Chinese firms from 2010 to 2022, we construct measures of pairwise ESG rating divergence and average them across 15 unique rater pairs. We then employ a battery of econometric methods to examine how inconsistencies in ESG ratings affect stock return synchronicity in the Chinese capital market. Findings-Our findings indicate that greater ESG rating divergence correlates with increased stock return synchronicity, suggesting a decline in the dissemination of firm-specific information. Supporting evidence for this relationship includes reduced private information flow, heightened opportunistic executive sales and decreased stock turnover for firms associated with higher ESG rating divergence. Our analysis suggests that such divergence hinders informed trading by institutional investors and the effect is more pronounced for firms with lower transparency, such as those with fewer analysts, limited investor oversight and sparse ESG disclosure, as well as for firms in non-polluting industries. These findings emphasize that ESG rating divergence exacerbates uncertainty about firms' future performance, discourages informed trading and ultimately restricts the integration of firm-specific information into stock prices. Originality/value-This study adds to the literature on ESG ratings and market efficiency by highlighting the importance of standardizing rating methodologies and improving corporate disclosure to counteract the adverse impacts of rating divergence.

This paper examines the impact of ESG rating divergence on stock price delays in the context of the Chinese capital market. We find that ESG rating divergence significantly increases the stock price delays. Mechanism analysis results suggest that ESG rating divergence affects stock price delays by reducing information transparency and firm internal control quality. Heterogeneous analysis results indicate that the impact of ESG rating divergence on stock price delays is more pronounced in high-tech firms and when investor sentiment is high.

We investigate the relationship between ESG rating divergence and stock returns from an investor’s perspective, to explore the impact of inconsistency among ESG rating agencies on the capital market. We construct ESG rating divergence data using ratings from three prominent ESG rating agencies in China. Our study is based on 54,679 company-quarter observations from 2018 to 2022, which covers 4,377 Chinese listed companies. Our findings demonstrate a significant negative impact of ESG rating divergence on stock returns, which we validate through a series of robustness tests and endogenous analyses. Notably, we find that investors’ expectations mediate the relationship between ESG rating divergence and stock returns. Further analyses show that only the divergence in social ratings have a significant inhibitory effect on stock returns. In addition, ESG rating divergence significantly impedes subsequent average ESG ratings. The adverse relationship between ESG rating divergence and stock returns is particularly pronounced in non-heavy pollution companies, non-state-owned companies, and companies with lower external attention.