Exploring the heterogeneous effects of environmental, social, and governance performance on idiosyncratic risk: do political ties matter?

Abstract As global attention to sustainable development intensifies, environmental, social, and governance (ESG) factors have become crucial for firms in managing stakeholder relationships and risks. However, the heterogeneous impact of different dimensions of ESG performance on idiosyncratic risk (IR) remains unclear. Drawing upon the stakeholder theory, this study investigates the differing impacts of separate E, S, and G performance on IR, as well as the contingency role of political ties. Using a dataset of 2436 Chinese listed firms from 2011 to 2019, the empirical results indicate that S and G performance significantly mitigate IR, and these linear negative relationships are enhanced by political ties. Surprisingly, the linear effect of E performance on IR is not significant, but the post-hoc analysis reveals an inverted U-shaped relationship between E performance and IR. More importantly, this curvilinear linkage is steeper for firms with political ties. Moreover, the heterogeneity analysis indicates that firms with the chief executive officer (CEO) duality make the effects of E, S, and G performance on IR insignificant. This study extends the growing literature on ESG and risk management, guiding firms to develop differentiated ESG investment strategies and offering actionable insights for firms to better benefit from their ESG performance.