Are ESG Ratings Helpful to Improving Capital Market Trading Activities?

ESG (environment, social, and governance) ratings provide an assessment of a firm’s sustainable performance. It is unclear how such ratings impact stock liquidity. Based on our analysis of Chinese A-share firms from 2016 to 2021, we find that ESG ratings are positively correlated with stock liquidity. The findings are robust to alternative metrics of ESG ratings and liquidity, and they take account of endogeneity into account as well. Further analysis shows that: (1) ESG ratings improve stock liquidity through the mechanisms of attracting market attention and improving corporate transparency; and (2) when investors’ demand for information is greater, ESG ratings have a more significant information effect; Moreover, (3) rating information showed a stronger positive effect after the COVID-19 pandemic, particularly in the areas severely affected by the pandemic and sustainable development industry. Our research shows that there are economic consequences of ESG ratings in emerging markets.