The Dual Impact of Sustainability Disclosure on Corporate Performance: An Empirical Analysis of Chinese Firms

ABSTRACT In recent years, the growing challenges posed by climate change have underscored the importance of sustainability disclosure in corporate governance and investment strategies. This study examines the dual effects of sustainability disclosure, measured by ESG scores, on corporate performance through a moderated effects analysis. Using a fixed‐effects model, the study analyzes data from 4943 Chinese firms between 2011 and 2021. The results indicate that sustainability disclosure has a dual impact: It significantly and negatively affects financial performance. Further analysis reveals that these impacts are moderated by a firm's capital structure and size. Specifically, firms with high growth prospects (as indicated by a high price‐to‐book ratio) experience enhanced market performance due to ESG disclosure, whereas highly leveraged firms may suffer financial performance losses. Additionally, the positive effect of ESG disclosure on financial performance is more pronounced in medium‐sized firms, highlighting the significant role of firm size in the relationship between ESG disclosure and performance. By analyzing the moderating effects of capital structure and firm size on ESG disclosure, this study offers new insights into the relationship between sustainability disclosure and corporate performance. It also proposes several policy recommendations, including integrating sustainability as a core objective with incentive mechanisms, promoting innovation compensation strategies, and enhancing stakeholder engagement.