Does ESG rating divergence depress trade credit? A signaling theory perspective

The significance of environmental, social, and governance (ESG) performance in relation to supply chain finance has been extensively studied. However, it remains unclear whether the incongruence among ESG rating scores from different ESG rating vendors for an individual firm, known as ESG rating divergence, impacts the firm’s trade credit received from its suppliers. Drawing upon signaling theory, we conceptualize ESG ratings across different vendors as a set of signals from third-party intermediaries and investigate the signaling effect of ESG rating divergence on trade credit. Further, we posit that this effect could be altered by signals from the focal firm or other third parties. Utilizing a longitudinal dataset comprising 2,780 Chinese listed manufacturing firms during the 2009–2022 period, we discover that ESG rating divergence negatively impacts trade credit. More importantly, this negative effect is mitigated by the buyer firm’s ISO 14001 certification and securities analyst coverage. Our study extends the ESG literature by uncovering the influence of ESG rating divergence on supply chain finance. It also broadens the application of signaling theory by examining the interplay of multiple signals from the focal entity and third parties.