Analyzing the dynamic relationship between ESG scores and firm value in Chinese listed companies: insights from generalized cross-lagged panel model

Abstract

The relationship between a company’s Environment, Social and Governance (ESG) scores and market value dynamics has been the focus of extensive research. Our study aimed to provide insights into this relationship and its implications for Chinese investors. We used a general Cross-lagged panel model to analyze data from 652 Chinese-listed companies from 2013 to 2019. Our findings indicate that ESG scores have a long-term impact on market value, with a consistently positive correlation between the two. We also discovered that Chinese investors consider ESG factors when evaluating a company’s financial health. Companies that prioritize ESG factors are more likely to attract investment. Moreover, the diffusion of ESG information happens slowly, and past ESG performance influences future ESG performance. Thus, maintaining good ESG performance is crucial for long-term sustainability and success. In addition, our analysis reveals significant insights into the interplay between ESG metrics and mandatory disclosure regulations. Specifically, we find that the interaction between average ESG score and mandatory disclosure significantly impacts firm value, suggesting a nuanced relationship between ESG performance and market valuation in the context of regulatory requirements. Overall, our study highlights the importance of considering ESG factors when evaluating financial health and making investment decisions, providing valuable insights for firms and investors alike.