ESG Performance and Enterprise Value in China: A Novel Approach via a Regulated Intermediary Model

Abstract

ESG (environmental, social, and governance) performance increasingly influences enterprise valuation. While researchers debate about the precise nature of this influence, most assume a positive linear relationship. This study introduces a novel ESG responsibility performance metric utilizing a regulated intermediary model using representative data synthesized from leading ESG rating agencies in China. It investigates the pathways of this influence and examines the mediating effects of corporate reputation, stakeholder engagement, and regulatory compliance. The findings reveal an inverted U-shaped relationship between ESG performance and enterprise value, moderated significantly by financing constraints. These findings remain robust after accounting for potential endogeneity using instrumental variables. Heterogeneity analysis highlights that this inverted U-shaped relationship depends on the industry characteristics and ownership structures, particularly noticeable in non-polluting and non-state-owned enterprises. Moreover, enhanced ESG performance correlates with a reduced cost of equity financing, thereby augmenting enterprise value. Financial institutions might consider employing innovative financial instruments to diversify their enterprise financing channels and effectively bolster ESG-focused enterprises.