Noise reduction or idiosyncratic information? ESG performance and stock price synchronicity in China

As environmental, social, and governance (ESG) practices become increasingly central to corporate strategy, understanding their impact on capital market efficiency becomes crucial for investors and policymakers. This study examines the relationship between ESG performance and stock price synchronicity using data from Chinese A-share listed companies during 2010-2022. Employing two-stage least squares estimation with regional ventilation coefficients as instrumental variables, we find that ESG performance significantly reduces stock price synchronicity—a result more consistent with the idiosyncratic information hypothesis than with the noise reduction hypothesis that has dominated prior Chinese market studies. We further document a reverse channel whereby high synchronicity prompts firms to strengthen their ESG practices, suggesting that OLS-based estimates of the ESG–synchronicity relationship are likely subject to reverse causality bias; our instrumental variable approach addresses this endogeneity and provides a more credible identification of the causal effect. Mechanism analysis reveals that ESG performance operates through two channels: enhancing corporate innovation and attracting institutional investor investment, both of which facilitate the incorporation of firm-specific information into stock prices. Heterogeneity analysis shows that these effects concentrate among firms with higher analyst coverage, lower financial reporting quality, and private ownership—conditions under which ESG disclosure carries greater informational value for price discovery. These findings carry implications for the design of ESG disclosure standards and governance reforms aimed at enhancing capital market efficiency in emerging markets.

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Publication Details

Journal
International Review of Economics & Finance
Published
2026-08-20
DOI
https://doi.org/10.1016/j.iref.2026.105769
Primary Topic
Auditing, Earnings Management, Governance
Type
article
Field-Weighted Citation Impact
0.00

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article

Noise reduction or idiosyncratic information? ESG performance and stock price synchronicity in China

Yiping Li, Dan Sun
International Review of Economics & Finance
Auditing, Earnings Management, Governance
article

Noise reduction or idiosyncratic information? ESG performance and stock price synchronicity in China

Yiping Li, Dan Sun
article en

Abstract

As environmental, social, and governance (ESG) practices become increasingly central to corporate strategy, understanding their impact on capital market efficiency becomes crucial for investors and policymakers. This study examines the relationship between ESG performance and stock price synchronicity using data from Chinese A-share listed companies during 2010-2022. Employing two-stage least squares estimation with regional ventilation coefficients as instrumental variables, we find that ESG performance significantly reduces stock price synchronicity—a result more consistent with the idiosyncratic information hypothesis than with the noise reduction hypothesis that has dominated prior Chinese market studies. We further document a reverse channel whereby high synchronicity prompts firms to strengthen their ESG practices, suggesting that OLS-based estimates of the ESG–synchronicity relationship are likely subject to reverse causality bias; our instrumental variable approach addresses this endogeneity and provides a more credible identification of the causal effect. Mechanism analysis reveals that ESG performance operates through two channels: enhancing corporate innovation and attracting institutional investor investment, both of which facilitate the incorporation of firm-specific information into stock prices. Heterogeneity analysis shows that these effects concentrate among firms with higher analyst coverage, lower financial reporting quality, and private ownership—conditions under which ESG disclosure carries greater informational value for price discovery. These findings carry implications for the design of ESG disclosure standards and governance reforms aimed at enhancing capital market efficiency in emerging markets.

International Review of Economics & FinanceVol. 111
Xiamen University (CN), Hunan Institute of Engineering (CN), Xiamen University of Technology (CN)
National Natural Science Foundation of China, Natural Science Foundation of Hunan Province
Industry, innovation and infrastructure
Openalex Percentile: Top 4%
Auditing, Earnings Management, Governance
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