ESG rating disagreement and the cost of equity capital

The growing controversy surrounding corporate environmental, social, and governance (ESG) ratings is increasingly drawing the attention of investors and becoming a focal point in academic research. This paper advances two competing hypotheses concerning the impact of ESG rating disagreement on the cost of equity capital: the confidence channel hypothesis and the information channel hypothesis. Utilizing data from Chinese A-share listed companies on the Shanghai and Shenzhen stock exchanges from 2015 to 2023 as our research sample, this study empirically investigates the effect of ESG rating disagreement on the cost of equity capital and its underlying mechanisms. The findings reveal that ESG rating disagreement increases firms' cost of equity capital, a relationship confirmed through extensive robustness tests. Mechanism analysis indicates that ESG rating disagreement elevates the cost of equity capital by undermining investor confidence (the confidence channel), while there is no evidence to support the notion that it reduces the cost of equity capital by decreasing information asymmetry (the information channel). Further analysis demonstrates that in heavily polluting industries, the adverse impact of ESG rating disagreement on the cost of equity capital is more pronounced. However, institutional investors' site visits and analyst coverage can alleviate the negative effects of ESG rating disagreement on the cost of equity capital.