Does ESG always improve corporate performance? Evidence from firm life cycle perspective

Abstract

In this study, drawing on firm life cycle theory, we focus on the corporate performance of Environmental, Social, and Governance (ESG) engagement via financial stress and consider the moderate effect of transparency, financial slack, and environmental uncertainty. The industry-year fixed effects panel regression analysis is executed based on the data including 11,742 firm-year observations for 1,486 Chinese A-share listed companies from 2010 to 2020. The results show that ESG performance can significantly improve corporate performance at all life cycle stages, especially when the corporate is in the growth stage. Moreover, the mechanism analysis shows that the financial risk mediates the relation between ESG performance and corporate performance for the corporates in the growth and maturity stages. The association between ESG and corporate performance is more pronounced when corporate information disclosure quality is high. Moreover, financial slack moderates and undermine the association between ESG and corporate performance in the maturity stages. Similarly, for the maturity and decline stages of corporate, environmental uncertainty moderates and undermines the association between ESG and corporate performance. Besides offering scientific evidence for the role of ESG ratings in relieving financial pressure and promoting corporate performance in growth and maturity stages, the results can also inform the regulators and/or investors of the benefit of engaging in corporates sustainability transition, which has implications for both the success of the regulatory regime and the advancement of long-term investment philosophy.

Impact of Tax Administration on ESG Performance—A Quasi-Natural Experiment Based on China’s Golden Tax Project III

“…The existing literature on ESG performance focuses on the economic consequences of ESG performance. Studies have found that improving ESG performance can enhance financial performance and firms' value [49][50][51][52], reduce accrued surplus management [55], alleviate financing constraints [56,57], improve customer stability [58], reduce corporate risk [62], etc. Fewer studies have focused on the factors influencing ESG performance.…”

“…In response to the economic consequences of ESG performance, considerable research has found that improving ESG performance can contribute to financial performance growth and enhance firm value [14,15,[49][50][51][52]. Profitability is one of the most critical indicators of a company and is related to shareholders' equity, long-term liabilities, provisions, deferred income within one year, total liabilities, working capital, and current assets [53].…”

The effect of Environmental, Social, and Governance disclosure on cost of debt: A life‐cycle perspective

“…The life-cycle stages of "introduction," "growth," "maturity," "decline," and "shake-out" are identified and categorized in prior literature. The risks associated with a lending process such as default risk and credit risk may vary with different phases of the corporate life cycle (Gao et al, 2023). For instance, firms in the initial stages of their life cycle often face financial constraints, uncertainty regarding future cash flows, a shortage of liquid assets, and challenges in raising additional capital.…”

Dimensions of corporate culture and financial performance: Evidence from Chinese publicly listed companies

“…Neralla [36] , Ludwig and Sassen [22] , etc., measured from the perspectives of the board of directors' size, proportion of equity incentives, governance structure, and the quality of corporate internal control. Gao et al [37] argued that ESG can significantly improve firm performance at all life cycle stages, and the association between ESG and firm performance is more pronounced when the quality of corporate disclosure is high. Based on the research results of Chinese and foreign scholars, this study divides the internal corporate governance culture into the dimensions of shareholders' rights and interests, governance structure, letter approval quality, and governance risk.…”