The Nonlinear Effect of ESG Performance on Firm Value: Evidence from Chinese Listed Firms

Purpose - The purpose of this study is to examine the relationship between ESG performance and firm value of Chinese Shanghai and Shenzhen A-share listed firms from 2013 to 2022. We also examine the relationship in China’s specific circumstances such as state ownership and heavily polluting industries. Design/methodology/approach - ESG data is mainly selected from HUAZHENG ESG rating. The data relating to finance and corporate governance is from China Stock Market & Accounting Research Database(CSMAR). The multiple regression analysis is hired in order to analyze the data. Findings - First, there is a nonlinear (inverted U-shaped) relationship between ESG performance and firm value. As ESG performance grows, its firm value experiences an initial increase, however, once the threshold value is reached, the additional increments in ESG performance result in a reduction in firm value. Second, the state-owned firms weaken the nonlinear inverted U-shaped relationship between ESG performance and firm value. Third, heavily polluting firms strengthen the nonlinear inverted U-shaped relationship between ESG performance and firm value. Research implications or Originality – Our findings show the existence of a nonlinear (inverted U-shaped) relationship between ESG performance and firm value, thereby offering a well-supported explanation for the inconsistencies observed in the existing research. Our study suggest Chinese firms need tailored ESG strategy for differentiated ESG thresholds for SOEs/non-SOEs and polluting sectors. Also, our study imply that standardized ESG disclosure is necessary to reduce compliance ambiguity and greenwashing risks.