ESG rating divergence and financing constraints: Evidence from China

In the context of the escalating global environmental, social, and governance (ESG) risks, ESG performance has increasingly become a crucial reference for companies when formulating business strategies. This paper, drawing on the information asymmetry and signaling theories, delves into the impact of divergences in ESG ratings among various institutions on corporate financing constraints. By taking the sample of Chinese A-share listed companies during the period from 2018 to 2022, and using an index of ESG rating divergence, we test the theoretical hypotheses. The empirical results indicate that ESG rating divergence exacerbates financing constraints, which still hold after conducting various robustness tests. From the perspective of analysts, this phenomenon occurs because the divergences in ESG ratings lead to increased prediction biases, thereby intensifying the corporate financing constraints. Nevertheless, compliant ESG disclosure can mitigate the adverse effects of ESG rating divergences on a company's financing constraints. Moreover, within enterprises with higher ESG ratings and greater profitability, the influence of ESG rating divergences on financing constraints is less pronounced. Further analysis shows that the effect of ESG rating divergence mainly stems from domestic rating divergence, domestic and international rating divergence, and environmental rating divergence. Additionally, the impact of the inter-institutional difference, potential for ESG development, and the impact on Alpha have also been analyzed. This study significantly enriches the theoretical framework of ESG rating divergences, provides new empirical evidence on the effects of ESG ratings divergences on corporate financing activities, and offers recommendations for investors to better grasp ESG information, as well as for both enterprises and governments to alleviate financing constraints.