Research On The Influence Of ESG Rating Agency Behavior On Capital Market Information Efficiency

With the increase in global climate risks and uncertainty,society’s attention to "green economy" and "green finance" has risen sharply.China has always been committed to maintaining world peace and promoting global development.The Carbon Peaking and Carbon Neutrality goal proposal signal China’s responsibility,efforts,and contributions as a major country to cope with global climate change.It demonstrates China’s determination to respond to climate change actively,take the path of green and low-carbon development,and promote the common development of all humanity.Under the guidance of the overall development strategy,Chinese enterprises have continuously improved in environmental protection,social responsibility practice,and other aspects of seeking new development models.Environmental,social,and corporate governance(ESG)assesses the extent to which corporate actions(commitments,performance,business models and structures,etc.)are aligned with the sustainable development goals,focuses on the interests of a wide range of stakeholders,and leads companies to value their long-term value and social contribution from a non-financial perspective.There are two main sources of information related to a company’s ESG.One is the company’s disclosure,disclosure quality,and the statistical data based on it;The other category is rating or scoring information provided by ESG rating agencies.Compared with the ESG information voluntarily disclosed by the company,the ESG information provided by the ESG rating agency of an external third party is considered more objective and credible,and the possibility of selective disclosure is lower.Understanding the impact of third-party ESG rating agencies’ rating behavior on the decision-making of capital market participants is essential to practicing ESG investment philosophy and promoting the value of impact investing.Important participants in the capital market,such as investors,financial analysts,and auditors,play an indispensable role in the capital market,and their decisions will directly or indirectly affect the information transmission and resource allocation of the capital market.Much literature studies the impact of corporate characteristics such as ESG performance,corporate behavior such as ESG information disclosure,and characteristics of financial analysts or auditors on the decision-making of capital market participants.Still,little literature considers the impact of ESG rating agency behavior on capital market information efficiency,nor has it considered the interaction effect of ESG rating and corporate ESG disclosure.Based on the practical background of promoting green finance and sustainable development,this paper theoretically analyzes and empirically examines the impact of ESG rating agency behavior on the information efficiency of the capital market.At the theoretical level,based on the theory of information asymmetry,stakeholder theory,and differentiated information,this paper argues that ESG rating agencies,as third-party organizations,play a role in collecting and releasing ESG-related information of companies by studying the company’s ESG policies,commitments and practices to judge the company’s sustainability and provide rating information,which can alleviate the information asymmetry between internal and external stakeholders.At the same time,through the tracking and attention of the company,it plays the role of supervising and regulating the management of violations or selfinterest.At the empirical level,this paper takes the data of A-share listed companies from 2009 to 2020 and the rating data of six commonly used ESG rating agencies in China,namely China Securities Securities,Runling Global,Hexun,Syn Tao Green Finance,Social Value Investment Alliance and Wande,as research samples.On the one hand,we characterize the behavior of ESG rating agencies from three dimensions: ESG rating intensity,rating performance,and rating dispersion.On the other hand,based on the cost of equity,financial analysts’ earnings forecast,and audit fees,the impact and mechanism of ESG rating agency behavior on multiple participants in the capital market are examined to provide micro-level evidence for better promotion of "green finance" and the implementation of "sustainable development" strategy.The main findings of this paper are as follows:First,ESG rating agencies play the role of "information supply" to reduce the cost of equity capital and improve the information efficiency of the capital market.Using the data on ESG rating agency behavior and cost of equity capital from 2009 to 2020,this paper empirically finds that: first,being rated by more institutions helps reduce the cost of equity capital;Secondly,the warning effect of lower ESG ratings will attract higher attention from investors,and the rating performance will weaken the cost of equity capital reduction effect of rating intensity;Third,since ESG rating dispersion represents uncertainty about a company’s ESG performance,rating dispersion will also reduce the cost of equity capital reduction effect of rating intensity;Finally,since ESG ratings help investors assess the sustainability of a company’s financial performance and company value,and reduce the information asymmetry between the company and investors,the impact of ESG rating agency behavior on the cost of equity capital mainly affects companies with low ESGrelated report disclosure quality(voluntary disclosure,disclosure with annual report,not in accordance with GRI standards,not verified by a third party)and poor overall information environment(smaller scale,less analyst following,less online media coverage,high earnings management).Second,ESG rating agencies play the "information supply" role in attracting more financial analysts and improving the accuracy of their earnings forecasts.Using the behavior of ESG rating agencies and earnings forecast data of financial analysts from 2009 to 2020,this paper empirically finds that: first,being rated by more ESG rating agencies helps attract more financial analysts to follow and reduce the error of earnings forecasting;Secondly,based on stakeholder theory and social norm compliance assumptions,financial analysts tend to follow more high ESG companies,so the information of higher ESG ratings is more useful,and the rating performance will enhance the impact of rating intensity on financial analysts’ earnings forecasts.Third,ESG rating dispersion will increase the cost and difficulty of financial analysts using ESG rating information,and rating dispersion will reduce the impact of rating intensity on financial analysts’ earnings forecasts.Finally,since ESG rating information helps financial analysts more accurately assess the company’s future financial performance,the impact of ESG rating agency behavior on analysts’ earnings forecasts mainly affects companies with low disclosure quality of ESG-related reports(voluntary disclosure,disclosure with annual reports,not following GRI standards,not verified by third parties)and a high degree of information asymmetry between analysts and companies(smaller scale,less online media coverage,high earnings management,fewer analysts with industry expertise among followed analysts).Third,ESG rating agencies play the "information examination" role and reduce audit fees for auditors.Using the data on the behavior of ESG rating agencies and audit fees of corporate financial statements from 2009 to 2020,this paper empirically finds that: first,being rated by more ESG rating agencies helps to reduce audit fees for auditors;Secondly,a high ESG rating helps to enhance the auditor’s trust in the company,and the rating performance will enhance the negative impact of rating intensity on audit fees.Third,ESG rating dispersion will increase the cost and difficulty of auditors using ESG rating information,and rating dispersion will reduce the negative impact of rating intensity on audit fees.The subsequent heterogeneity test shows that the negative impact of ESG rating intensity on audit fees is mainly concentrated on companies mandatorily disclose ESG-related reports,disclose ESG-related reports separately,or whose reports have not been verified by a third party,indicating that auditors use information from different sources for cross-checking during the audit of financial statements.Finally,the mechanism test finds that the negative impact of ESG rating intensity on audit fees is mainly concentrated in companies with high financial information transparency(large scale,more analyst following,more online media coverage,and low earnings management),that is,for companies with better financial information environment,non-financial information can reduce audit risks and audit fees.The research contributions in this paper are as follows:First,this paper introduces a new perspective on third-party ESG rating agencies,describes their behavioral characteristics from three dimensions: rating intensity,rating performance,and rating dispersion,and empirically tests their impact on capital market information efficiency,thereby enriching the research on the influencing factors of capital market information efficiency.Some theoretical and empirical studies that examine the impact of ESG information on capital market participants are mostly based on the non-financial information disclosure of the company itself or a single rating agency and rarely consider the differences in the behavior of different ESG rating agencies.The small amount of literature that studies the impact of the rating dispersion of ESG rating agencies in the US on investors and companies ignores the premise of rating dispersion-rating intensity.This paper deeply analyzes the behavior of ESG rating agencies in different dimensions and their interaction effects.It is an important expansion and supplement to the existing literature on the determinants of information efficiency in the capital market.Second,this paper comprehensively examines the impact of ESG rating agency behavior on investors,financial analysts,and auditors,explores the differences in perception of ESG rating performance among different capital market participants,and deepens the research on the mechanism of ESG rating agencies affecting capital market information efficiency.Although the literature finds that ESG ratings play a crucial role in investors’ assessment of company value and sustainability,few studies have comprehensively considered the impact of ESG rating agency behavior on the information efficiency of capital markets.Different capital market participants play different roles in a company’s operations and have different purposes,concerns,and information collection and processing capabilities,so there may be differences in the judgment of the same information.Based on the different roles of different capital market participants,this paper explores the differential impact of segmentation information and information quality from the perspective of ESG rating.Third,by studying the differentiated effects of ESG,financial,and nonfinancial information from different sources on the decision-making of capital market participants,this paper explores the interrelationship of the information under different conditions to promote the usefulness of non-financial information.First,for investors or financial analysts,when the quality of ESG reports disclosed by the company is low,or the company’s overall information environment is poor,the ESG information provided by the rating agency is more valuable,reflecting the "information supply" role of ESG rating;Second,for auditors,when the quality of ESG reports disclosed by the company is high,or the company’s overall information environment is better,the ESG information provided by the rating agency is more valuable,reflecting the "information examination" role of ESG ratings to help verify the accuracy of information from other sources.The heterogeneity of information interrelationships found in this paper has important implications for integrating and using financial and non-financial information from various sources.