How do firms respond to divergent ESG ratings? The perspective of green innovation

While firms commonly receive notably divergent Environmental, Social, and Governance (ESG) ratings from different rating agencies, how they respond to these divergences remains largely unexplored. Using a sample of 2079 Chinese public firms during 2018-2022, we aim to answer this question by empirically investigating how ESG rating divergence affects firms' green innovation efforts. Our empirical results reveal a robust negative impact of such divergence on firms' future green innovation patent applications. The two-stage regression results based on the instrumental variable approach confirm that the impact is causal. Further analyses indicate that divergent ESG ratings inhibit green innovation efforts by increasing firms' capital costs and information asymmetry. Consistent with this mechanism, we document that the inhibitory effect is more pronounced for firms with greater financial constraints, poorer information environments, or larger stock or financial performance pressures.