Lost in Ratings : ESG Divergence and Managerial Short－Termism

[Purpose]This study explores the impact of ESG rating divergence on managerial short－termism, a tendency where managers prioritize short－term financial performance over long－term value creation. [Methodology]We use panel data on A－share listed companies in China from 2015 to 2021 and conduct a logit regression analysis to examine the relationship. [Findings]This study finds that firms with greater ESG divergence are significantly more likely to exhibit short－term managerial behavior, indicated by reduced R&D investment. Mechanism analysis shows that ESG divergence influences managerial behavior primarily through increased agency costs due to diminished transparency, heightened volatility in investor sentiment leading to stricter financing constraints, and greater reputational risk triggered by negative media coverage. Cross－sectional analyses show this effect is more pronounced in firms with weak internal controls and stricter financial constraints. We also find that ESG－induced managerial myopia reduces firm value in the short to medium term, though the effect weakens over time. [Implications]Our findings highlight a critical behavioral consequence of ESG divergence, as it can distort managerial incentives and spur short－termism, ultimately undermining long－term firm sustainability. These results advocate for improved standardization and transparency in ESG rating practices and highlight the need for strong internal governance mechanisms that can protect firms from information－related uncertainties.