<scp>ESG</scp> Signals and Green Innovation Quality: The Roles of Institutional Ownership and Market Competition

ABSTRACT How to foster high‐quality green innovation has become a critical question for firms pursuing sustainable transformation. Yet, it remains insufficiently understood whether and how ESG‐related signals contribute to this process. Drawing on signaling theory, this study examines the effect of ESG performance, as an observable proxy for ESG signals, on green innovation quality using panel data from Chinese A‐share listed firms during 2019–2024. The results show that ESG performance is positively associated with green innovation quality. The three ESG dimensions do not exert equal effects, with governance showing the strongest influence. Institutional ownership serves as an important signal interpretation mechanism through which ESG‐related credibility is translated into higher‐quality green innovation. Market competition further strengthens both the direct effect of ESG performance and the indirect effect transmitted through institutional ownership. Additional analyses indicate that these effects are more pronounced among growth‐stage firms, firms in heavily polluting industries, and non‐high‐tech firms. The study extends the ESG‐green innovation literature by shifting attention from innovation quantity to quality formation and enriches signaling theory by showing that the innovation consequences of ESG depend on investor interpretation and market context.