From Market Optimism to Sustainability: How Investor Sentiment Shapes ESG Performance through CEO Power and Board Gender Diversity

ABSTRACT Firms face increasing pressure from investors and stakeholders to enhance environmental, social, and governance (ESG) practices, yet the mechanisms through which market sentiment shapes ESG outcomes remain unclear. This study examines how investor sentiment influences ESG performance, focusing on the mediating role of CEO power and the moderating role of board gender diversity. Drawing on a panel of 770 nonfinancial Chinese listed firms from 2010 to 2022, we integrate data from the China Stock Market and Accounting Research (CSMAR) database with ESG ratings from the Wind database. Investor sentiment is measured using a composite index derived from principal component analysis; CEO power is captured across five organizational dimensions, and board gender diversity is assessed by the proportion of female directors. Our findings show that positive investor sentiment enhances ESG performance, while simultaneously constraining CEO power, which partially mediates the sentiment–ESG relationship. Moreover, board gender diversity amplifies the positive impact of investor sentiment on ESG outcomes. These results advance understanding of how behavioral and governance factors interact to shape sustainability practices. From a policy perspective, the findings underscore the need for governance systems that limit excessive CEO dominance, encourage board diversity, and align corporate strategies with investor expectations to foster sustainable and transparent capital markets.