Research on the impact of environment, social and governance performance on corporate valuation: Evidence from China

Abstract

AbstractWith the greater popularity and recognition of the environment, social, and governance concept, it has increasingly become the focus of investors and enterprises in corporate valuation, capital allocation, strategic planning, and investment decision‐making. The environment, social, and governance framework covers many factors that affect a company's long‐term financial performance and sustainable development, so the environment, social, and governance characteristics of the company will reflect the long‐term value it can create in the future. Previous studies have rarely confirmed a strong positive correlation between corporate environment, social and governance performance, and valuation, and even if confirmed, they have not explained how environment, social, and governance performance affect valuation. Therefore, the originality of this paper lies in explaining how environment, social, and governance affect valuation, as well as discovering which factors in environment, social, and governance affect valuation, and which characteristics of the company will strengthen or weaken this impact. This paper uses a two‐way fixed effect model to study the impact of environment, social, and governance performance on the valuation of listed companies in Shanghai and Shenzhen A‐share markets from 2014 to 2021. Research findings: Enterprise environment, social, and governance performance can significantly improve its valuation, and the impact of environmental and social performance is more significant. Mediating effect test found that enterprise environment, social, and governance performance improves enterprise valuation by reducing the cost of capital, increasing investor attention, and reducing corporate financial risk. The moderating effect found that compared to state‐owned enterprises, the valuation of non‐state enterprises is highly influenced by environment, social, and governance performance, and corporate information transparency can also promote the transformation of environment, social, and governance performance to valuation. After a series of robustness and endogeneity tests, the results can still support the conclusions of this article. The contribution of this study is to provide empirical evidence for the positive economic consequences of environment, social, and governance performance, which has certain implications for enterprises and investors to attach importance to environment, social, and governance performance, and for government departments to improve environment, social and governance incentive policies. Due to the limitations of selecting only A‐share listed companies for the sample, further research is needed on the applicability of the conclusions of this article to other countries or small and medium‐sized enterprises. In future research, we need to continue to investigate whether there are any other influencing mechanisms that have not been discovered by us.