Leadership Power: The Absence of Political Incentives and ESG Performance

Yu Meng and Maoyong Cheng

Accounting and Finance, 2025, vol. 65, issue 5, 4446-4472

Abstract: In China's cadre‐appointment system, frequent municipal leadership turnover and administrative delays can generate temporary vacancies that sever political ties and weaken firms' political incentives. We ask whether such absent political incentives reduce or, instead, increase firms' ESG performance. We hand‐collect monthly city‐level data on municipal party‐secretary vacancies and match them to monthly Wind ESG scores from 2018 to 2021 (160,776 firm‐month observations). It is observed that as political incentives diminish, corporations proactively augment their ESG performance. Our results are robust to using difference‐in‐differences estimation, instrumental variable analysis, matching analysis, alternative proxies for the absence of political leaders, subsample analysis and various fixed effects. Two mechanisms are supported: alleviated financial constraints and heightened investor attention. The effect is stronger for firms with greater learning capacity and better corporate governance. Our evidence shows that when political incentives weaken, firms substitute towards ESG as a non‐market strategy, informing debates on the political economy of ESG and offering practical guidance for investors, managers and policymakers designing disclosure and incentive regimes.

Date: 2025
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