Could corporate ESG performance impacts controlling shareholders tunneling: evidence from China

Using a sample of Chinese listed firms, this study investigates how corporate environmental, social, and governance (ESG) performance affects tunneling by controlling shareholders. We find that higher ESG performance significantly reduces tunneling, with this effect being stronger in state-owned enterprises and in firms operating in more developed legal environments. Mechanism analyses indicate that internal control enhancement, information promotion, investor protection, and market attention serve as four key channels through which ESG curbs tunneling. Cross-sectional tests reveal that the disciplining effect of ESG is more pronounced when monitoring by non-controlling large shareholders is weaker, when the divergence between control and cash-flow rights is larger, and when listed firms are subject to stricter regulatory oversight (e.g., A + H share listings). We also document significant spillover effects, whereby a firm’s ESG disclosure reduces tunneling among industry-region peers. Overall, this study provides new evidence on how ESG disclosure mitigates agency conflicts between controlling and minority shareholders in settings with weaker institutional safeguards. The findings underscore the value of integrating ESG practices into corporate governance to protect minority investors and promote sustainable business development.