Digital Transformation of Firms and ESG Rating Divergence: An International Context

The significant divergence in Environmental, Social, and Governance (ESG) ratings between domestic and foreign agencies poses a major challenge for firms operating internationally, increasing information risk and impeding cross-border investment. This study investigates whether corporate digital transformation can serve as a strategic tool to reduce this divergence and whether this divergence hinders corporate internationalization. Using a sample of Chinese A-share listed firms from 2015 to 2023, we find that a higher degree of digital transformation significantly narrows the ESG rating gap between domestic and foreign agencies. We identify the mitigation of information asymmetry as the primary mechanism, evidenced by heightened Internet searches, increased research reports and analyst coverage, and reduced discretionary accruals. Furthermore, we find that ESG rating divergence hinders firms' internationalization, underscoring the economic significance of our findings. Cross-sectional analysis reveals that the negative effect of digital transformation on ESG rating divergence between domestic and foreign agencies is more pronounced for firms facing inherently higher information barriers: those located farther from financial centers, in less competitive industries, and non-state-owned enterprises. This study bridges the literature on digital transformation and international ESG finance, offering practical insights for firms seeking to enhance their global ESG credibility and facilitate international expansion, and providing a new lens through which to view the role of digitalization in resolving international information frictions.