ESG performance and corporate fraudulence: Evidence from China

Abstract

By adopting a large sample of Chinese public listed firms from 2014 to 2021, we examine whether firms' ESG performance inhibits corporate fraud. Using panel data regression techniques, we find that high ESG performance mitigates corporate fraudulence. After conducting a series of robustness tests, including propensity score matching (PSM) model, Heckman two-step sample selection model, instrumental variable (IV) and 2SLS regression model, and firm fixed effect model, the results remain unchanged. Further analyses suggest that this negative relationship is more pronounced in non-state-owned enterprise (non-SOE) firms and firms that voluntarily disclose ESG information. The mechanism analysis suggests that high-quality ESG engagement improves firms' governance performance and inhibits managerial myopia, which thereby mitigates corporate fraud. Overall, our findings provide incremental evidence on the role of ESG in filling institutional voids in emerging economies. Our findings also provide significant policy implications to regulators and policy makers who seek to promote fair information disclosure and mitigate corporate fraud risk.