Abstract:
With the growing adoption of sustainable development concepts, the ESG rating has become an important reference for investors' decision-making. However, there are significant divergences in ESG ratings assigned by different rating agencies to the same company, resulting in inadequate effectiveness of ESG ratings. Using the ESG reports of A-share listed companies from 2018 to 2022 as the research sample, this paper empirically examines the impact of ESG report readability on the divergence of ESG ratings and explores the underlying mechanisms from three perspectives, including the difficulty of information extraction, emotional interference, and signaling theory. The study finds that the greater the textual complexity of a firm's ESG report (i.e., the poorer its readability), the greater the divergence of ESG ratings. The heterogeneity analysis supports the hypothesized mechanisms that the effect of ESG report readability on amplifying the divergence of ESG ratings is more pronounced for firms with higher internal control quality and when the ESG report length is shorter and lacks verification by third parties. This paper provides implications for standardizing non-financial information disclosure regulations and enhancing the effectiveness of ESG ratings.
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