Corporate ESG performance and capital-market value creation: evidence from China

Purpose This study aims to examine the relationship between corporate environmental, social and governance (ESG) performance and capital-market value creation in China, with a focus on testing for U-shaped effects and exploring the underlying mechanisms that drive this relationship. Design/methodology/approach Panel data on Chinese A-share listed firms from 2007 to 2022 are used. The study uses fixed-effects panel regression models and a generalized propensity score approach, and also investigates financing constraints and green innovation mechanisms. Besides, conduct subgroup analyses by ownership type, industry pollution intensity and firm size to assess heterogeneity in the relationship between corporate ESG performance and capital-market value creation. Findings Corporate ESG performance and capital-market value creation exhibit a U-shaped relationship. Firms with very high or very low ESG scores outperform those with moderate ESG engagement in terms of market valuation. The analysis of mechanisms shows that ESG performance has an inverted U-shaped effect on financing constraints and a U-shaped effect on green innovation. Furthermore, the U-shaped effect is more pronounced for private firms, firms in less-polluting industries and smaller firms, whereas it is muted or nonexistent for state-owned enterprises, firms in high-pollution industries and larger firms. Originality/value To the best of the authors’ knowledge, this study is the first to provide comprehensive evidence of a U-shaped relationship between corporate ESG performance and capital-market value creation. It identifies financing constraints and green innovation as key channels through which ESG performance creates value. The findings offer novel insights into how context factors – such as ownership structure, industry environmental risk and firm size – modulate the returns on corporate sustainability investments. These insights have practical implications for managers seeking to maximize the value impact of ESG initiatives, investors evaluating corporate ESG efforts and policymakers aiming to support sustainable corporate practices in emerging markets.