ESG ratings and the cost of equity capital in China

• Published in: Energy economics 2024-08, Vol.136, p.107685, Article 107685
• Main Authors: Li, Yunzhong, Zhao, Yu, Ye, Chengfang, Li, Xiaofan, Tao, Yunqing
• Format: Article
• Language: English
• Subjects: Cost of equity capital; ESG ratings; Information asymmetry; Operational risk
• ISSN: 0140-9883
• DOI: 10.1016/j.eneco.2024.107685

Using the initial ESG ratings of the SynTao Green Finance in 2015 as a quasi-natural experiment, this study identifies the causal effect of ESG ratings event on the cost of equity capital (CEC) of firms by using the staggered difference-in-differences method. We find that implementing ESG ratings event can reduce the CEC of firms. This conclusion remains valid after a series of robustness tests. The mechanism tests show that this event helps to reduce corporate operational risks and the information asymmetry between investors and firms, thereby lowering the CEC. Heterogeneity tests indicate that this effect is more pronounced in non-state-owned, high-competitive, and high-pollution enterprises. Overall, our findings reveal that the implementation of ESG ratings event has positive effects by reducing the CEC, which provides fresh insights into the positive effects of ESG ratings. •This study identifies the causal effect of ESG ratings event on firms' CEC.•We find that implementing ESG ratings event can reduce firms' CEC.•This event helps reduce corporate operational risks and the information asymmetry between investors and firms.•This effect is more pronounced in non-state-owned, high-competitive, and high-pollution enterprises.