Corporate hypocrisy and ESG rating divergence

Abstract

We draw upon impression management theory and cognitive dissonance theory to examine whether or not corporate hypocrisy triggers substantial environmental, social, and governance (ESG) rating divergence and to further investigate the influence channels of cognitive dissonance and impression management. In addition, our study explores the moderating role of media coverage with different emotional biases in shaping the relationship between corporate hypocrisy and ESG rating divergence. By utilizing a comprehensive dataset comprising 3562 Chinese listed companies and 25,898 firm‐year observations from 2010 to 2022, findings reveal that hypocritical firms exhibit significantly large ESG rating divergence. In particular, these firms induce cognitive dissonance among rating agencies, resulting in rating disparities, which are further magnified when using impression management through the selective disclosure of negative information or symbolic promotion of positive information. Furthermore, positive media coverage weakens the positive association between corporate hypocrisy and ESG rating divergence, whereas negative media coverage strengthens this relationship. Lastly, we find that the impact of corporate hypocrisy on ESG rating divergence is more pronounced for companies with higher average ESG scores, lower long‐term charitable involvement, and lower information opacity. These findings withstand various sensitivity tests utilizing alternative measures for rating divergence and corporate hypocrisy, as well as different sample compositions. Our conclusions remain robust even after addressing endogeneity concerns using a two‐stage least squares regression model.