ESG Ratings and Dividend Changes: Evidence From the Initiation of Nonfinancial Agency Coverage

ABSTRACT Research Question/Issue This paper examines whether the coverage of nonfinancial rating (NFR) agencies affects corporate dividend policy. Research Findings/Insights We argue that dividend payout may decrease (increase) if NFR agencies provide information that reduces (increases) shareholder–manager agency (shareholder–stakeholder) conflict. We find that the coverage by an NFR agency is followed by an increase in dividends. This result is more pronounced for firms with more influential shareholders, poorer financial performance, and greater ESG commitment. We corroborate our findings using the acquisitions of NFR agencies and the expansion of NFR agencies' coverage as two main exogenous shocks. Lastly, our results hold for both US firms and non‐US firms. Theoretical/Academic Implications Collectively, this paper supports that the ESG ratings made available by NFR rating agencies following their rating coverage increase shareholder–stakeholder conflict to a greater extent than its effect on reducing shareholder–managers agency conflict. Practitioner/Policy Implications Our paper delivers critical insights to regulators striving to comprehend the functions of NFR agencies within the capital market more effectively. Such an understanding can further support their efforts to formulate new guidelines suitable for the burgeoning and swiftly evolving industry of NFR agencies.