Can ESG boost zombie firms back to normal: Evidence from Chinese firms

Abstract

In recent years, the Chinese government has put forward sustainable development and reduced the negative macroeconomic impact of zombie firms. As a channel for firms to engage in green development, can ESG exert its value effect and help firms out of the zombie dilemma? This paper studies the impact of ESG on zombie firms and the influence mechanism by using data from China A-share listed companies from 2011 to 2019. While ESG requires firms to invest more externally, we find that ESG can also help zombie firms return to normal by increasing total factor productivity. The additional analysis finds that external funding support also plays an important role in mitigating ESG costs and better performing ESG functions. In addition, the positive effect brought by ESG is primarily driven by firms in eastern China, non-heavily polluting firms, and non-state-owned enterprises. These findings contribute to the burgeoning literature on ESG and provide implications for zombie firms’ governance and government policy.