Governance matters: evidence from ESG performance and stock misvaluation in China

Purpose This study investigates the relationship between firms' ESG performance, its three pillars as well as ESG disclosure and stock price efficiency in the Chinese stock market. It examines whether ESG engagement and ESG disclosure primarily reduce misvaluation through improved information environments or instead amplify valuation distortions through investor sentiment and belief reinforcement. Design/methodology/approach Using Chinese A-share firms from 2009 to 2020, stock misvaluation is measured as the deviation between market value and estimated intrinsic value under the Rhodes-Kropf-style misvaluation framework. ESG data are sourced from Huazheng, with Wind data used for robustness, alongside endogeneity checks using 2SLS and dynamic GMM models. Findings Aggregate ESG performance exhibits only a weak association with stock misvaluation. In contrast, governance performance consistently improves price efficiency by reducing both overvaluation and undervaluation, while environmental and social dimensions exhibit weaker and less consistent effects. Although ESG disclosure is associated with lower information asymmetry, disclosure also strengthens the valuation effect of ESG performance. Practical implications The results suggest that strengthening corporate governance and ESG disclosure can enhance market efficiency in China. The findings are consistent with the view that greater ESG transparency may contribute to improved information environments. Investors should focus on governance quality rather than aggregate ESG scores, while firms should prioritize substantive governance improvements over symbolic ESG actions. Originality/value The study provides new evidence from an emerging market with voluntary ESG disclosure and a retail-investor-dominated structure. It highlights heterogeneous effects across ESG pillars, identifying governance as the primary driver of pricing efficiency. The findings suggest that ESG-related pricing effects in China reflect a combination of information, behaviour and signalling mechanisms.