A non-linear assessment of ESG and firm performance relationship: evidence from China

Ganlin Pu

Economic Research-Ekonomska Istraživanja, 2023, vol. 36, issue 1, 2113336

Abstract: The main objective of this paper is to assess the non-linearities between the ESG activities and firm performance in case of an emerging market. China is identified as a case study for the present examination. Even though this research objective has been explored by past researcher, the evidence presented in literature is not conclusive. The paper hypothesizes that such conflicting or inconclusive results can potentially be attributed to wrong modeling, datasets that include both developing and the developed markets, and the prevalent endogeneity issue in corporate governance literature. For the purpose of this paper, the author uses the dynamic panel approach of First difference and the System Generalized Method of Moments. The findings from the analysis of 232 Chinese listed firm show a positive association between ESG activities and the firm performance. However, the relationship is nonlinear. In other words, the relationship between ESG activities and the firm performance is inverted U-shaped. This indicates the relationship is positive up to a certain threshold and once the ESG activities cross that threshold it start to have negative effect. The key insight from this research is that the firm has to find their threshold of ESG activities to gain maximum benefits from such activities.

Date: 2023
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DOI: 10.1080/1331677X.2022.2113336

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