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ESG rating disagreement, volatility, and stock returns

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  • Zeng, Qingduo
  • Xu, Yang
  • Hao, Mengshu
  • Gao, Meiqi

Abstract

We present a rational expectation equilibrium model to explore how ESG rating disagreement impacts stock returns. Our findings reveal that high disagreement in ESG rating is associated with high return volatility risk, which potentially leads to increased stock returns. Our empirical results confirm a positive impact of ESG disagreement on stock returns, reinforcing our theoretical findings. The mechanism tests suggest that ESG disagreement enhances stock returns by amplifying idiosyncratic return volatility. Overall, our research sheds light on how ESG disagreement affects stock returns through market microstructure, and offers valuable insights into the role that ESG disagreement plays in ESG investing.

Suggested Citation

  • Zeng, Qingduo & Xu, Yang & Hao, Mengshu & Gao, Meiqi, 2025. "ESG rating disagreement, volatility, and stock returns," Finance Research Letters, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324016313
    DOI: 10.1016/j.frl.2024.106602
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    More about this item

    Keywords

    ESG rating disagreement; Stock returns; Volatility; Rational expectation;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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