Do ESG-superstar firms inhibit the ESG performance of their industry peers?

Corporate ESG (Environmental, Social, and Governance) practices play a vital role in sustainable development. As industry leaders, ESG star companies set an example that promotes overall progress but may also cause inefficient ESG escalation among competitors. Managing this “double-edged sword” effectively is crucial for optimizing corporate ESG governance. This study develops a corporate ESG competition model, revealing both the demonstrative and inhibitory effects of ESG star companies. Using panel data from 4,018 listed companies across 80 industries in China's A-Share market from 2012 to 2022, the demonstration paradox is confirmed. The findings indicate that the impact of ESG star firms on their peers' ESG performance follows a significant 'inverted U-shaped' non-linear pattern. When the ESG ranking gap between star firms and their peers is moderate, the demonstration effect is strong and encourages peers to enhance their ESG performance. However, if the gap exceeds a critical point, the demonstration effect turns into a paradox, actually hindering peers' ESG improvements. Mechanism tests show that a moderate ranking gap mainly motivates peers to invest more in ESG through competitive pressure transmission. In contrast, a larger gap tends to suppress ESG investment by draining resources and decision-making space via resource siphoning. Heterogeneity analysis reveals that the inflection point occurs later in competitive industries, low-carbon industries, and among private peer firms, meaning the demonstration effect lasts longer. Conversely, in oligopolistic industries, high-carbon sectors, and among state-owned firms, the inflection point happens earlier, and the demonstration paradox appears sooner. Further research indicates that ESG star firms with a stronger sense of responsibility delay the inflection point, extending the demonstration effect, while those with weaker responsibility advance it, leading to an earlier paradox. This study advances understanding of corporate ESG externalities and provides new theoretical and empirical insights for addressing the inefficiencies in sustainable development.