The Impact of ESG Rating on Stock Price Synchronization of Listed Companies: Evidence from China

. To explore the latest feedback from the Chinese capital market on listed companies’ ESG evaluation, we construct a two-way ﬁxed-e ﬀ ects model with a sample of Chinese A-share listed companies from 2018-2020 to empirically investigate the relationship between ESG rating and share price synchronization, and the impact mechanism is also explored from both internal and external perspectives of ﬁnancial constraints and analyst attention. It is found that, a high ESG rating helps reduce the stock price synchronization, while ﬁ-nancial constraints play a partial mediating e ﬀ ect and analyst attention plays a full mediating e ﬀ ect. In addition, the e ﬀ ect is more pronounced among manufacturing ﬁrms and non-SOEs. This study enriches the research related to ESG and stock price informativeness, and the ﬁndings provide important basis for the long-term benign development of ESG philosophy


Introduction
The United Nations Environment Programme (UNEP) introduced the concept of "ESG" for the first time in 2004, advocating that enterprises pay attention to non-financial performance in the areas of environmental protection, social responsibility and corporate governance in their production and operation activities. In recent years, issues such as environmental pollution, climate change and social equity have received further attention, environmental, social, and governance (ESG) performance of listed companies have also attracted significant interest from capital markets globally. As Chinese government had clearly put forward the goal of "carbon emission peak" and "carbon neutralization", the construction of a green financial system has become one of the national development strategies. Based on these backgrounds, ESG investment has gradually emerged in China. As a typical non-financial information indicator, ESG rating of listed companies is incorporated into the corporate non-financial performance evaluation system, but the impact of this on the pricing efficiency of capital market remains a common concern for investors and academics. In 2018, the China Securities Regulatory Commission promulgated a new version of the Guidelines for the Governance of Listed Companies, which constructed a basic framework for ESG information disclosure and promoted the further standardization and in-depth application of non-financial information disclosure of listed companies in China.
Capital market plays an important role in resource allocation in national economy, and stock prices can guide resource allocation and optimize it gradually in strong form capital market. Stock price synchronization, which refers to the level of stock price fluctuations of individual company relative to the average fluctuations of the market and industry, is one of the common indicators to measure the information efficiency of capital markets. French and Roll (1986) [1] propose that stock price synchronization is related to the relative content of market-and industry-level information and firm-level information contained in the stock price. The more information about the characteristics of the company is incorporated into the stock price, the more the stock price reflects the true value of the listed company and the more efficient the capital market will be. However, in Chinese A-share market, stock price is more reflective of industry and market-level factors, and the phenomenon of "same rise, same fall" is more common, showing a high degree of stock price synchronization overall. Though it has gradually matured after years of development, the regulatory system and information disclosure system are still being improved. ESG evaluation can still be a novelty in China's capital market and we aim to investigate whether and how ESG ratings can influence the synchronization of listed companies' stock prices, so that the pricing efficiency of China's capital market can be enhanced, which is of great theoretical and practical significance. This paper differentiates from the existing literature mainly in the following ways: 1)It simultaneously constructs the internal and external impact paths of ESG rating on stock price synchronization through mediating effects. 2) In terms of sample timeliness, most samples of existing studies are mostly lagging, while this paper selects the data of ESG ratings and stock price synchronicity for 2018 and beyond, which better reflect the latest impact of ESG on Chinese A-shares and the latest trends in the capital market.
The remainder of the paper proceeds as follows: Sect.2 reviews the literature and puts forward hypotheses; Sect.3 introduces the research design; Sect.4 illustrates the empirical results and analysis; Sect.5 presents the conclusions. Morck et al. (2000) [2]use the fitting coefficient "R 2 " of a pricing model to measure stock price synchronization, and after years of development and refinement, this indicator has been widely used to measure the informativeness of stock prices. So far, a large number of researchers have conducted studies on the factors affecting stock price synchronization and their economic consequences from multiple dimensions, and most of them agree with Jin and Myers(2004) [3] that differences in the level of capital market development and the institutional environment are the root causes of the differences in the degree of stock price synchronization across countries.

Literature Review
Non-financial information disclosure of listed companies was once regarded as a mechanism to improve the information efficiency of the capital market. A number of researchers have confirmed the significant association between the disclosure of information related to environmental [4][5][6][7], CSR [8][9][10][11] and corporate governance [12][13][14]issues of listed companies and the synchronization or crash risk of stock price. Meanwhile, the degree of influence of E, S and G factors on stock price synchronization varies across contexts [15], while in China, the ESG rating has been shown to be negatively related to the crash risk of stock price [16] and investors have paid more attention to environmental factors in recent years [17].
As for the impact path of ESG on stock price synchronization, Qiu and Yin (2019) [18] test the impact of ESG performance on corporate finance, the result shows that financing costs would be significantly lower when the company performed better in environmental and governance aspects. Bae et al. (2021) [19] find that the improvement of ESG rating significantly reduces the risk of stock price collapse of listed companies, while financial constraints restrain this effect. Evidence from 53 countries around the world also shows that good ESG performance of firms contributes to lower financing cost, especially in poor market environments [20].From the aspect of ESG information interpretation, existing studies have shown a significant link between analyst attention and stock price synchronization [21,22]. Information intermediaries such as analysts and institutional investors play a dual role of information transmission and monitoring governance, which help to enhance the firm-level information content in stock prices [23].
The relationship between non-financial information disclosure and share price fluctuation has been helpfully explored in a large body of literature in the past, with a particular focus on the relationship between CSR disclosure and share price collapse risk, and researchers have developed two main views on the motivation of CSR investment: "self-interest tool" and "value creation". In recent years, the explosion of ESG concept has also given rise to a large number of ESG-related studies such as the relationship between ESG and financial factors and the impact of ESG on investor preference, but there are still few studies focusing on the relationship between ESG ratings of listed companies and the informativeness of their stock prices.

Research Hypothesis
ESG rating, as a comprehensive indicator of a firm's non-financial performance, might contain key information hidden behind the firm's financial performance, which is a popular index of the firm's sustainability and helps to alleviate the information asymmetry between the firm and investors [24]. The higher the ESG rating, the more non-financial information a firm discloses to its stakeholders, the more effective it is in reducing the information asymmetry between corporate management and core stakeholders such as creditors and shareholders, enabling more firm-specific information to be incorporated into the share price. Therefore, we proposed Hypothesis 1. ESG rating is negatively related to the stock price synchronization of listed companies.
Good ESG evaluation helps to promote investor confidence in corporate management and develop a high social reputation, reducing corporate transaction costs. Based on signaling theory and resource dependence theory, a higher ESG rating can send positive signals to the outside world, which is conducive to a good social image of the company and influences the assessment of investors and creditors on the company's business risks and development potential, thus affecting the cost of corporate financing. Financial constraint, on the one hand, as a manifestation of operating distress, is likely to stimulate managers to whitewash corporate accounting information, while the improvement of ESG rating is conducive to alleviating financial constraints, and managers' manipulations of information are subsequently reduced, leading to the improvement of information asymmetry. On the other hand, financial institutions will actively participate in corporate governance in order to protect their own rights and interests when providing credit support, and put forward higher requirements for corporate information disclosure. That is, the effect of debt governance can improve the quality of corporate information disclosure and so that restrain stock price synchronization. Further enlightened by the research of Barakat et al. (2013) [25], we believe that under the scenario that a higher ESG rating helps a firm to obtain credit support from banks and other financial institutions to ease financial constraints, ESG rating can improve the level of corporate information disclosure by promoting the effect of debt governance, thus reducing stock price synchronism. Accordingly, we put forward Hypothesis 2. Financial constraints play a mediating effect in the impact of ESG rating on stock price synchronization.
ESG-focused companies are more likely to disclose more realistic and reliable information with company specificity in their ESG reports, which will be diffused to the capital market through the information intermediation of analysts and institutional investors to introduce corporate-level information into the stock prices. In addition, ESG investment philosophy emphasizes sustainability and long-term returns, and institutional investors are more likely to collect in-depth company information and participate in corporate governance based on long-term interests than individual investors [26], thus listed companies with higher ESG ratings are more likely to receive attentions from institutional investors and analysts. As an effective external governance mechanism, the participation of these information intermediaries will also form a non-coercive constraint on listed companies, which might influence management's decision making and is conducive to improving the company's information disclosure level. Therefore, this paper proposes Hypothesis 3. ESG rating reduces stock price synchronization by enhancing analyst attention.

Data and Sample Selection
This paper selects listed companies traded on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) from 2018 to 2020 as the initial research sample. Referring to the existing empirical studies, the following processing were done: (1) excluding ST, *ST, PT stocks and stocks with less than 30 trading weeks per year; (2) excluding the samples of financial and real estate industries; (3) excluding listed companies with missing ESG ratings, stock price synchronization, key financial data and other abnormal samples. We finally obtain 6529 sample observations from 2394 companies. Meanwhile, to mitigate the effect of extreme values, we winsorize the main continuous variables at the 1% and 99% levels. The ESG data used in the subsequent empirical analysis part of this paper is from Wind "Huazheng" ESG ratings, and the listed companies' stock price synchronization indicators and other data are from China Stock Market & Accounting Research Database (CSMAR).

Main Empirical Models and Definitions of Variables
A two-way fixed effect regression model is constructed by using panel data samples.
In formula (1), and respectively represent the company's individual fixed effect and the fixed effect of the year, ε represents a random error term.
As for the measurement of stock price synchronization, this paper regress the weekly return of stock with reference to the research of Durnev et al (2003) [27]. The regression method is like formula (2), is used to represent stock price synchronization. Individual stocks, industries and market volatility levels all take into account the rate of return of cash dividend reinvestment, the calculation method adopts sub-market equal weight average method, and "R 2 " is used to express the annual stock price synchronization of individual stocks. r i,t = α i + β i,1 r m,t + β i,2 r I,t + ε i,t .
(2) r i,t represents the return rate of stock i in week t, r m,t is the return rate of market index in week t , r I,t is return rate of industry I in weekt. In the selection of control variables, this paper considers other internal and external factors that may affect stock price synchronization, including stock liquidity, audit quality, corporate financial status, governance level and so on. the symbols and definitions of all the variables involved in this paper are shown in table 1.

Descriptive Statistical Analysis
The results of descriptive statistics for all variables are displayed in table 2., the mean value of SYN is 0.4646, which is basically consistent with its median value. The average values of FC and Analyst are respectively 0.4337 and 1.5777, which are slightly larger than their medians, indicating that the sample distribution is slightly right; in addition, the standard deviation of FC index and analyst attention of the sample are respectively 0.2741 and 1.5736, the gap between the maximum and minimum is large, suggesting that the degree of financial constraints and analyst attention of various listed companies in China are polarized. Figure 1 is the histogram of the frequency distribution of ESG ratings in the sample. when 1 to 9 are used to represent the ESG ratings, it can be found that in recent years, the ESG ratings of listed companies in China are mainly between 4 and 9, and the number of ESG ratings with "BBB" in the sample is the most, with an average ESG rating of 6.4848, which is higher than the median of 6. The standard deviation of ESG rating is 1.2267, both Figure 1 and table 2 show that although the ESG ratings of Chinese listed companies are generally high, there are still large differences across sample firms, which may be related to the differences in industry types, resources owned by companies and operational ideas.

The Results of Baseline Regressions
According to the regression results shown in table 3, through Hausman test, we select the fixed effect model to verify the relationship between ESG rating and stock price synchronization of listed companies. At the same time, in order to eliminate the influence of other potential factors, the later regressions control company and year fixed effect. The regression result of column (3) in table 3 shows that the regression coefficient of stock price synchronization to the ESG rating is-0.0085, which is significant at the level of 5%, so Hypothesis 1 can be supported.

Path Analysis
On the basis of model (1), this paper refers to Wen et al. (2004) [28] on the empirical test method of intermediary effect to verify hypothesis 2 and hypothesis 3, we use the stepwise regression model to test whether financial constraints and analysts' attention play an intermediary effect in the impact of ESG rating on stock price synchronization. The regression models are as follows: Column (2) of table 4 shows the regression result of FC to ESG. At a significant level of 5%, ESG rating is negatively correlated with financial constraint, indicating that good ESG performance can alleviate the financial constraints faced by listed companies. At the same time, column (3) shows that after adding the intermediary variable FC, the regression coefficient of SYN to ESG is still significant, and when the financial constraint is alleviated, the stock price synchronization will decrease, which proves that the financial constraint plays a part of the intermediary effect in the influence of ESG rating on stock price synchronization. Hypothesis 2 is supported. The regression result of column (4) shows that the regression 1810 Standard errors in parentheses *** p < 0.01, ** p < .05, * p < 0.1 coefficient of analyst attention to ESG rating is positive and significant at 1% level, the improvement of ESG rating can attract more analysts' attention. According to column (5), after adding the intermediary variable Analyst, the regression coefficient of SYN to ESG is no longer significant, and the improvement of analyst attention can reduce stock price synchronization, that is, analyst attention plays a complete mediating effect, thus the regression result supports Hypothesis 3.

Robustness Test and Further Analysis
In order to ensure the reliability of the research conclusions, the robustness test is carried out. This paper firstly controls for omitted variable bias by constructing a two-way fixed effects model and corrected for heteroskedasticity by adding robust standard errors. In addition, we recalculate the stock price synchronization index using the integrated market equal-weighted average method to obtain a proxy variable for SYN and regress the ESG ratings again, the results still support the previous conclusions. Furthermore, considering the heterogeneity of listed companies, this paper also performs inter-group regressions. The samples are divided into manufacturing, non-manufacturing firms and state-owned, non-state-owned firms based on the type of industry and nature of ownership to which the listed firms belong, the results are shown in table 5. Columns (1) and (4) indicate that the effect of ESG rating in reducing stock price synchronization is more significant in manufacturing and non-state-owned firms. In China, listed manufacturing firms are usually more ESG-sensitive compared to non-manufacturing firms, and most of the common negative ESG evens, such as product quality failures, environmental pollution and safety or casualty accidents, usually occur in manufacturing industry. In addition, ownership type also influences ESG disclosure [29], and the extent to which firms invest in ESG and the expectations and feedback from stakeholders on their ESG performance. SOEs naturally have the dual attributes of public benefit and profitability, and are also more likely to receive credit financing support than non-SOEs, so that higher ESG ratings of SOEs are more likely to be taken for granted. In summary, when ESG ratings of manufacturing firms and non-SOEs are upgrading, both financial institutions such as banks and information intermediaries such as institutional investors and analysts will pay more attention to and participate in the process, resulting in the decrease of stock price synchronization.

Conclusions
This study research the impact of ESG rating on share price synchronization of Chinese A-share listed companies since the release of the Guidelines for the Governance of Listed Companies (2018 Revision), and explore the impact mechanism from factors inside and outside the company. Through the empirical study, we mainly draw the following conclusions: (1) high ESG ratings restrain listed company's share price synchronization; (2) financial constraints play a partial mediating effect and analyst attention plays a full mediating effect in the influence mechanism of ESG rating on share price synchronization; (3) the reducing effect of higher ESG ratings on share price synchronization is more significant among manufacturing companies and non-SOEs.
The findings of this study have implications for promoting the long-term benign development of ESG. First, we suggest that the CSRC and other departments accelerate the construction of an authoritative ESG assessment system for listed companies, further standardize and refine ESG disclosure, establish a unified ESG database for listed companies and set up subdivision standards for each industry, and take measures to guide companies to actively disclose relevant information and gradually shift to mandatory disclosure. Besides, institutional investors and analysts should actively pay attention to the ESG performance of listed companies and act well as information intermediaries, while playing demonstration effect and monitoring function to stimulate listed companies to continuously improve their ESG performance and information disclosure quality. Finally, banks and other financial institutions should actively participate in the formulation and promotion of green credit policies and so on to bring into play the effect of debt governance and promote a virtuous cycle of the ESG system.