Corporate Financialization, ESG Performance and Sustainability Development: Evidence from Chinese-Listed Companies

Abstract

With changing times as countries pursue sustainable development, traditional profit-driven strategic decisions are no longer sustainable. A well-planned financial investment may improve a business’s capital flow efficiency, but when short-term wealth overrides long-term value, the financialization of companies will inevitably impede their environmental, social, and governance (ESG) performance. This study examined how company financialization was related to its ESG performance by China Listed Companies between 2010 and 2019. According to empirical tests using data from the China Stock Market & Accounting Research database and the Wind Financial Terminal, corporate financialization negatively affects ESG performance. After a series of robustness tests, such as endogenous analysis, the conclusion still holds. Furthermore, financialization dampens ESG performance more in the private sector and in companies with high technology dependence. Mechanistic analysis shows that corporate financialization not only creates long-term value risks through crowding out real capital and appropriation of green resources but also undermines company ESG performance through a lack of balanced development to achieve objectives and capabilities. Lastly, using the green patent data provided by the Chinese Research Data Services Platform database, it is found that improved green technology innovation can mitigate the damage of corporate financialization on ESG performance, and this mitigation is more pronounced in regions with better green development. This study adds to the empirical evidence on the theoretical and controversial role of corporate financialization. It helps to warn of its short-sighted effects on sustainable development and provides implications through the positive effects of green technology innovations.