Do Financial Constraints Weaken the Stability Benefits of Sustainability Performance?

ABSTRACT This study examines the nexus between sustainability performance and financial stability, with a focus on the moderating role of financial constraints in Chinese‐listed firms. Using panel data from 5226 firms from 2018 to 2024, we find that sustainability performance and its dimensions (environmental, social, and governance) significantly improve financial stability. However, these benefits are substantially diminished when firms face high financial constraints. We address endogeneity through fixed effects, instrumental variables, GMM, and a difference‐in‐differences analysis of China's 2021 mandatory ESG disclosure policy. The moderating effect is especially strong for non‐state‐owned enterprises and firms in pollution‐intensive industries. Mechanism tests indicate that constraints weaken signaling credibility and increase information asymmetry, reducing the stabilizing impact of sustainability initiatives. Our findings highlight that while sustainability engagement enhances corporate resilience, its effectiveness depends critically on financial flexibility. This study integrates agency, signaling, and resource‐based theories, offering actionable insights for managers and policymakers seeking to leverage sustainability for financial stability.