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Comparing the Financial Performance Effect of International and Local ESG Ratings: A Two-stage DEA Approach

Author

Listed:
  • Louis T. W. Cheng

    (Hang Seng University of Hong Kong, Hong Kong, P. R. China)

  • Chun Kei Tsang

    (Hong Kong Shue Yan University, Hong Kong, P. R. China)

  • Shu Kam Lee

    (Hong Kong Shue Yan University, Hong Kong, P. R. China)

Abstract

ESG rating divergence is an important empirical and debatable issue that can lead to confusion from corporate users [Berg, F, JF Koelbel and R Rigobon (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, 26(6), 1315–1344] but also possible additional information disclosure as a result of subjective interpretations of analysts [Christensen, DM, G Serafeim and A Sikochi (2022). Why is corporate virtue in the eye of the beholder? The case of ESG ratings. The Accounting Review, 97, 147–175]. Cheng et al. [2023. Understanding resource deployment efficiency for ESG and financial performance: A DEA approach. Research in International Business and Finance, 65, 101941] adopted Data Envelopment Analysis (DEA) to evaluate the proportional and pillar mix efficiency of ESG among Chinese firms. However, their study relies solely on MSCI data and overlooks the discrepancies in ratings among various ESG rating agencies. This study addresses a research gap by examining how differences in international and local ESG ratings may impact resource deployment efficiency and financial performance at the firm level. Using a sample of 1639 Chinese firms from 2018 to 2022, this study aims to provide insights into firm-level resource deployment efficiency to enhance both ESG and financial performance through comparisons of international and local ratings. Specifically, we utilize ESG performance scores from MSCI (international) and SynTao (local) and employ a Two-Stage DEA (T-DEA) framework. This approach allows us to first assess their proportional and pillar mix efficiencies and subsequently analyze their effects on financial performance. Our findings reveal a significant and distinct pattern of efficiency distributions, along with corresponding reallocation recommendations based on the international versus local ESG measures. The divergence in ESG results aligns with the cultural effect/local bias phenomenon documented in the capital market valuation literature.

Suggested Citation

  • Louis T. W. Cheng & Chun Kei Tsang & Shu Kam Lee, 2024. "Comparing the Financial Performance Effect of International and Local ESG Ratings: A Two-stage DEA Approach," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-21, December.
    • Handle: RePEc:wsi:afexxx:v:19:y:2024:i:04:n:s2010495225500010
    DOI: 10.1142/S2010495225500010
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    Keywords

    ESG; DEA; proportional efficiency; pillar mix efficiency; financial performance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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