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      Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement
      09 Mar 2021Working Paper Summaries

      Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement

      by George Serafeim and Aaron Yoon
      Company performance evaluations have included sell-side analyst forecasts, recommendations, and credit ratings, but a newer set has emerged: environmental, social, and governance (ESG) ratings. This study finds that ESG ratings are useful for predicting future ESG news, but their predictive ability diminishes for firms with large disagreement between raters.
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      Author Abstract

      We investigate whether ESG ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. Relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens while the rating with most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: January 2021
      • HBS Working Paper Number: 21-079
      • Faculty Unit(s): Accounting and Management
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      George Serafeim
      George Serafeim
      Charles M. Williams Professor of Business Administration
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