The effect of ESG rating disagreement on stock liquidity: evidence from China

Purpose
This study investigates how Environmental, Social, and Governance (ESG) rating disagreement affects stock liquidity in the Chinese capital market. It further examines the information-intermediation mechanisms and firm-level conditions that shape this relationship.

Design/methodology/approach
Using panel data from 4,065 Chinese A-share listed firms over the period 2009–2021, this study employs fixed-effects regressions, instrumental variable techniques, and mediation and moderation analyses. ESG rating disagreement is measured by the dispersion of ratings across five ESG agencies.

Findings
The results show a significant positive relationship between ESG rating disagreement and stock liquidity. Mediation analyses indicate that analyst attention and research report attention transmit the effect of rating disagreement on liquidity by improving information processing and transparency. Moderation analyses reveal that the effect is stronger in non-state-owned enterprises and loss-making firms, where reliance on non-financial signals is greater.

Research limitations/implications
The analysis focuses on Chinese A-share firms and stock liquidity as the primary market outcome. Future research could extend the framework to other institutional settings and examine additional market consequences such as volatility, price efficiency, or cost of capital.

Practical implications
The findings suggest that ESG rating disagreement can serve as an informative signal for market activity and liquidity. They also highlight the importance of information intermediaries in shaping ESG-related market responses and underscore the role of disclosure quality and rating transparency in improving market efficiency.

Originality/value
This study advances the ESG literature by demonstrating that rating disagreement, rather than ESG performance alone, has important liquidity implications, by uncovering its information-based transmission mechanisms, and by identifying firm-level conditions under which its market impact is amplified.