ESG rating uncertainty and corporate financial misconduct

Abstract

Drawing on the fraud triangle theory, we examine the impact of environmental, social, and governance (ESG) rating uncertainty on corporate financial misconduct. Using a dataset of Chinese listed companies, we find a positive relationship between ESG rating uncertainty and corporate financial misconduct. The mediation analysis results suggest that this relationship can be explained by increased financial constraints and reduced institutional investor monitoring. Furthermore, we find that the positive relationship between ESG rating uncertainty and corporate financial misconduct is more pronounced in heavily polluting industries and those facing intense competition, whereas board governance, the legal system, and Confucian culture help weaken this positive relationship. Overall, our study provides new evidence that ESG rating uncertainty leads to more corporate financial misconduct, thereby emphasizing the significance of being vigilant to the dark side of divergent ESG ratings in capital market regulation.