The impact of ESG performance on R&D investment stability: Evidence from China

This study investigates how Environmental, Social, and Governance (ESG) performance influences corporate R&D stability. Based on Chinese A-share listed firms, we find that ESG performance mitigates the effect of market shocks on R&D activities, particularly during negative market conditions. This effect stems from ESG performance enhancing the external financing environment, thereby reducing R&D investment's reliance on internal financing, which primarily comes from sales revenue. Cross-sectional analysis show that the impact of ESG on R&D investment stability is more pronounced in firms with higher corporate governance and lower external financing availability. Additionally, the improvement in R&D stability is particularly evident in non-SOEs, high-tech enterprises, and pollution enterprises. This paper provides insights into the innovation risk management of ESG practices.