Do Digital City Policies Promote Corporate ESG Performance? Evidence from Research on Textual Analysis of China

Abstract

ABSTRACT One of the major aims of digital city development is to improve the cities’ natural and social environment friendliness, which aligns with the target of the ESG strategy. However, it is still unclear how to measure the impact of digital city development on ESG performance. This paper examines how digital city policies affect the ESG performance of firms. We propose a methodology to quantify digital city policies based on the textual analysis (BOW method) and measure the level of digital city policy support in each prefecture-level city in China from 2011 to 2022. Further, we introduce instrumental variables (IV), PSM, and other methods to empirically investigate the impact effects and obtain the following main conclusions: First, the digital city policy positively impacts firms’ ESG performance. After controlling for the fixed effects of the different dimensions, a 1% increase in the level of digital city policy support represented by the DCPI raises firms’ ESG scores by about 2%. Second, the facilitating effect of digital city policies on the sub-dimensions of ESG is asymmetric. Digital city policies significantly affect the environmental protection and corporate governance dimensions of firms, while the effect on CSR is not significant. Third, the impact of digital city policies on ESG performance is heterogeneous across different regions of China and cities with different population sizes. This paper will enrich the understanding of digital city policies and the research on institutional factors affecting ESG, which will provide some insights to both business managers and policymakers.