Corporate ESG rating and stock market liquidity: Evidence from China

Abstract

This paper investigates the impact of corporate environmental, social, and governance (ESG) rating on a firm's stock market performance. Using Chinese publicly listed companies from 2010 to 2020, we find that ESG rating significantly improves stock liquidity; a series of robustness tests further verify this result. We also find that this effect is more pronounced in firms with less political connection, weaker corporate governance, and less transparent information environment. Furthermore, investor attention mediates the relationship between ESG rating and stock liquidity. Our results provide significant implications for the importance of ESG rating in deterring information asymmetry and promoting corporate governance in markets with many retail investors and relatively weak investor protection.