IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v65y2025i4p3966-3982.html

Does Rating Consistency Matter? A Micro‐Level Study on the Impact of Corporate ESG Rating Divergence on Equity Financing Costs

Author

Listed:
  • Jun Li
  • Yujie Hou
  • Changchun Tan
  • Longyan Han

Abstract

The influence of ESG rating divergence on corporate finance is receiving increasing scholarly attention as ESG concerns become more prominent. However, few studies have systematically examined how ESG rating discrepancies affect corporate equity financing costs. This study addresses this gap by analysing data from Chinese A‐share listed firms between 2015 and 2022 to explore the impact of ESG rating divergence on equity financing costs and its underlying mechanisms. The results reveal that: (1) ESG rating divergence significantly raises equity financing costs, suggesting that capital markets impose a risk premium on inconsistent ESG information; (2) this effect is more pronounced in firms with greater external analyst forecast dispersion and more severe internal agency problems; (3) firms that are non‐state‐owned, face significant financial constraints, or have poor information quality are particularly vulnerable to this effect. The study contributes to the understanding of the economic consequences of ESG rating divergence and offers policy implications for regulators, institutions, investors and firms in navigating ESG‐related challenges.

Suggested Citation

  • Jun Li & Yujie Hou & Changchun Tan & Longyan Han, 2025. "Does Rating Consistency Matter? A Micro‐Level Study on the Impact of Corporate ESG Rating Divergence on Equity Financing Costs," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 65(4), pages 3966-3982, December.
    • Handle: RePEc:bla:acctfi:v:65:y:2025:i:4:p:3966-3982
    DOI: 10.1111/acfi.70057
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.70057
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.70057?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Lian, Yonghui & Ye, Tao & Zhang, Yiyang & Zhang, Lin, 2023. "How does corporate ESG performance affect bond credit spreads: Empirical evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 352-371.
    2. George Serafeim & Aaron Yoon, 2023. "Stock price reactions to ESG news: the role of ESG ratings and disagreement," Review of Accounting Studies, Springer, vol. 28(3), pages 1500-1530, September.
    3. Ole‐Kristian Hope, 2003. "Disclosure Practices, Enforcement of Accounting Standards, and Analysts' Forecast Accuracy: An International Study," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 41(2), pages 235-272, May.
    4. Liu, Haiming & Chiang, Yao-Min, 2024. "Employment protection and environmental corporate social responsibility: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 92(C).
    5. So, Eric C., 2013. "A new approach to predicting analyst forecast errors: Do investors overweight analyst forecasts?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 615-640.
    6. Chan, Wesley S. & Frankel, Richard & Kothari, S.P., 2004. "Testing behavioral finance theories using trends and consistency in financial performance," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 3-50, December.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. Jiang, Guohua & Lee, Charles M.C. & Yue, Heng, 2010. "Tunneling through intercorporate loans: The China experience," Journal of Financial Economics, Elsevier, vol. 98(1), pages 1-20, October.
    9. Zhang, Dongyang & Kong, Qunxi, 2022. "Renewable energy policy, green investment, and sustainability of energy firms," Renewable Energy, Elsevier, vol. 192(C), pages 118-133.
    10. Custódio, Cláudia & Metzger, Daniel, 2014. "Financial expert CEOs: CEO׳s work experience and firm׳s financial policies," Journal of Financial Economics, Elsevier, vol. 114(1), pages 125-154.
    11. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    12. Chen, Kevin C. W. & Chen, Zhihong & Wei, K. C. John, 2011. "Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 171-207, February.
    13. Fan, Joseph P.H. & Wei, K.C. John & Xu, Xinzhong, 2011. "Corporate finance and governance in emerging markets: A selective review and an agenda for future research," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 207-214, April.
    14. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    15. Wang, Kai & Li, Tingting & San, Ziyao & Gao, Hao, 2023. "How does corporate ESG performance affect stock liquidity? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    16. Geng, Yuan & Chen, Jinyu & Liu, Ran, 2024. "ESG rating disagreement and corporate green innovation bubbles: Evidence from Chinese A-share listed firms," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    17. Zhao, Yuanshuang & Dong, Liang & Sun, Yuhang & Ma, Yunning & Zhang, Ning, 2024. "Is air pollution the original sin of firms? The impact of air pollution on firms' ESG scores," Energy Economics, Elsevier, vol. 136(C).
    18. Damon Clark & Paco Martorell, 2014. "The Signaling Value of a High School Diploma," Journal of Political Economy, University of Chicago Press, vol. 122(2), pages 282-318.
    19. Aaron K. Chatterji & Rodolphe Durand & David I. Levine & Samuel Touboul, 2016. "Do ratings of firms converge? Implications for managers, investors and strategy researchers," Strategic Management Journal, Wiley Blackwell, vol. 37(8), pages 1597-1614, August.
    20. Hovakimian, Armen & Hovakimian, Gayane & Tehranian, Hassan, 2004. "Determinants of target capital structure: The case of dual debt and equity issues," Journal of Financial Economics, Elsevier, vol. 71(3), pages 517-540, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lou, Zhukun & Li, Sujie & Tong, Jingyi & Zhao, Jing, 2025. "ESG rating disagreement and the cost of equity capital," Global Finance Journal, Elsevier, vol. 66(C).
    2. Xu, Nianhang & Song, Danwen & Xie, Rongrong & Chan, Kam C., 2024. "Sibling co-management and cost of capital: Evidence from Chinese listed family firms," Journal of Corporate Finance, Elsevier, vol. 89(C).
    3. Ruan, Lei & Li, Jianing & Huang, Siqi, 2025. "ESG rating adjustment and capital market pricing efficiency: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 98(C).
    4. Teng, Huiyang & Zhang, Jiawei & Li, Xiaoshuo & Li, Bin, 2025. "ESG rating divergence and future corporate ESG performance: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 108(PB).
    5. Richard W. Carney & Travers Barclay Child, 2015. "Business Networks and Crisis Performance: Professional, Political, and Family Ties," Tinbergen Institute Discussion Papers 15-135/V, Tinbergen Institute, revised 20 Feb 2015.
    6. Hamdi Ben‐Nasr & Narjess Boubakri & Jean‐Claude Cosset, 2012. "The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(3), pages 605-646, June.
    7. Belkhir, Mohamed & Saad, Mohsen & Samet, Anis, 2020. "Stock extreme illiquidity and the cost of capital," Journal of Banking & Finance, Elsevier, vol. 112(C).
    8. Liu, Xiangqiang & Peng, Yuling & Li, Qinyang & Wu, Chu-Hua, 2025. "CEO pay structure and ESG rating disagreement," International Review of Financial Analysis, Elsevier, vol. 102(C).
    9. Ruan, Lei & Li, Jianing & Huang, Siqi, 2024. "News or noise? ESG disclosure and stock price synchronicity," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    10. Liu, Wei & Tian, Gary Gang, 2022. "Controlling shareholder share pledging and the cost of equity capital: Evidence from China," The British Accounting Review, Elsevier, vol. 54(6).
    11. Saad, Mohsen & Samet, Anis, 2017. "Liquidity and the implied cost of equity capital," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 15-38.
    12. Chai, Hongrui & Cheng, Zhenhao & Wu, Weixing, 2025. "Is ESG performance a protective umbrella for ESG violations?," International Review of Financial Analysis, Elsevier, vol. 98(C).
    13. Zhang, Cheng & Zha, Qianyao & Sun, Xun & Chen, Liping, 2024. "Does ESG rating disagreement affect audit opinions?," International Review of Economics & Finance, Elsevier, vol. 96(PA).
    14. Chaudhry, Neeru & Dhawan, Priya, 2025. "Does firms' commitment towards CSR influence idiosyncratic volatility? Evidence from India," Emerging Markets Review, Elsevier, vol. 68(C).
    15. Chen, Hua & Wang, Zhuang, 2025. "Does ESG rating disagreement affect management tone manipulation?," International Review of Financial Analysis, Elsevier, vol. 101(C).
    16. Lian, Yonghui & Yang, Zixin & Cao, Hong, 2025. "Does ESG performance affect trade credit financing? Evidence from China," Research in International Business and Finance, Elsevier, vol. 74(C).
    17. Qian, Binsheng & Poshakwale, Sunil & Tan, Yusen, 2024. "‘E’ of ESG and firm performance: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    18. Altavilla, Carlo & Bochmann, Paul & De Ryck, Jeroen & Dumitru, Ana-Maria & Grodzicki, Maciej & Kick, Heinrich & Fernandes, Cecilia Melo & Mosthaf, Jonas & O’Donnell, Charles & Palligkinis, Spyros, 2021. "Measuring the cost of equity of euro area banks," Occasional Paper Series 254, European Central Bank.
    19. Wang, Jianli & Xiao, Xiao & Dong, Minghua & Li, Jingyuan, 2025. "Does ESG rating disagreement discourage corporate green innovation? Evidence from China," Research in International Business and Finance, Elsevier, vol. 80(C).
    20. Atanas Mihov & Andy Naranjo, 2019. "Corporate internationalization, subsidiary locations, and the cost of equity capital," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(9), pages 1544-1565, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:65:y:2025:i:4:p:3966-3982. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.