Does social trust affect firms' ESG performance?

Abstract

This study examines whether and how social trust affects corporate ESG performance using data on Chinese A-share listed companies from 2011 to 2020. We find a significantly positive relationship between social trust and corporate ESG performance. In the heterogeneity analysis, the positive effect is more pronounced for firms in high-polluting industries, firms facing fierce market competition, and firms in which the managers face greater career risks. In an additional analysis, we find that institutional quality and economic development are the two underlying channels through which social trust affects corporate ESG performance. These findings remain consistent across robustness tests, such as replacing variable measurement methods, changing sample intervals, and adding city and industry fixed effects. This study suggests that local social trust can inspire business to be good, and also provides some insights for regulators to improve corporate ESG performance through raising informal institutions.