The Effect of ESG Performance on Corporate Innovation in China: The Mediating Role of Financial Constraints and Agency Cost

Abstract

The effectiveness of environmental, social, and corporate governance (ESG) performance has been widely discussed and is often linked to corporate financial performance or firm value by academics and practitioners. However, a significant research gap remains unexplored; specifically, prior scholars have ignored path research about the effect of ESG performance on corporate innovation, and they have also ignored the impacts of the heterogeneity of stakeholders. Therefore, taking China’s A-share listed companies as an example, the research applied linear regressions with panel data, using the ESG rating of SynTao Green Finance Agency as a proxy variable of ESG performance. The results show that ESG performance significantly promotes the quantity and quality of corporate innovation and is mediated by alleviating the financial constraints and agency cost. Internal and external governance plays different roles; the higher institutional investors’ attention as an external governance form does not help enterprises improve the quantity and quality of corporate innovation; however, CEO duality as an internal governance form strengthens the effect of ESG performance on corporate innovation. This study provides scientific evidence for the effect and effect path of ESG performance on promoting proactive innovation based on sustainable development in China; furthermore, the study reveals the heterogeneity factors of ESG performance on the innovation effect under stakeholder theory.