Formalism or Substantialism: ESG and Stock Crash Risk

We use a specifically chosen data set of Chinese A-share listed businesses from 2009 to 2022 to investigate the complex relationship between stock crash risk and company Environmental, Social, and Governance (ESG) performance. Based on empirical investigation, a complex U-shaped dynamic is revealed, in which early advances in ESG performance work as a protective factor against stock collapse risk initially, but with ESG performing better, this impact reverses and becomes an enhancer of stock crash risk. We carry out a thorough mediation study to elucidate the underlying mechanisms, revealing the critical roles that business reputation and analyst scrutiny play in mediating the U-shaped link between stock crash risk and ESG. Furthermore, we explore possible moderating factors and find that the adoption of ESG in state-owned organizations and businesses operating in less marketized environments may be motivated by instrumental factors, which would ultimately increase the likelihood of a stock market crash. Thus, by providing a complex and dialectical approach that unites disparate points of view, our work adds to the specialist conversation on the economic consequences of ESG.