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Bus Strat Env - 2022 - Zhou - Sustainable Development ESG Performance and Company Market Value Mediating Effect of
Bus Strat Env - 2022 - Zhou - Sustainable Development ESG Performance and Company Market Value Mediating Effect of
DOI: 10.1002/bse.3089
RESEARCH ARTICLE
1
School of Economics, Fudan University,
Shanghai, 200433, China Abstract
2
School of Finance, Shanghai University of At present, more and more attention is paid to the sustainable development of enter-
Finance and Economics, Shanghai, 200433,
prises. In particular, in the context of frequent financial crises and COVID-19 pandemic,
China
how the performance of listed companies' environmental, social, and governance (ESG)
Correspondence
affects the company's market value has attracted widespread attention. Different from
Sumei Luo, Professor, PhD, School of Finance,
Shanghai University of Finance and existing studies, this paper takes financial performance as a mediating variable and con-
Economics, Shanghai 200433, China.
structs linear regression model and mediating effect model based on analyzing the rela-
Email: [email protected]
tionship between ESG performance, financial performance, and company market value
Funding information
and their influencing mechanism. The ESG rating data of Chinese listed companies
Major Program of the National Social Science
Foundation of China, Grant/Award Number: newly developed by SynTao Green Finance from 2014 to 2019 were selected for
21&ZD117
empirical test. The results show that the improvement of ESG performance of listed
companies can improve the market value of the company, and the financial performance
of the company presents an obvious mediating effect. At the same time, operational
capacity is an important mediating way for ESG performance to affect the company's
market value. Further research shows that ESG performance of state-owned listed com-
panies exerts a stronger mediating effect on corporate operating capacity. Finally, this
paper provides relevant suggestions for regulators, listed companies, and investors.
KEYWORDS
corporate social responsibility, ESG performance, financial performance, green finance, market
value, sustainable development
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,
provided the original work is properly cited.
© 2022 The Authors. Business Strategy and The Environment published by ERP Environment and John Wiley & Sons Ltd.
the investment concept based on ESG performance still valid in enterprise value are relatively sufficient, and the early studies are
China's capital market? If so, what is the intrinsic relationship between mainly based on the traditional cost school view, which holds that
ESG performance and the value attributes of the company itself? environmental performance and enterprise value are mutually incom-
What will happen when environmental governance, social responsibil- patible. Typical studies such as Al-Tuwaijri et al. (2004) point out that
ity, and corporate governance are no longer separated from each corporate environmental performance will reduce investors' evalua-
other and their relationship to financial performance and market value tion of enterprises and affect corporate value, and it has nothing to do
is studied? Under the background that domestic and international cap- with financial indicators of corporate profitability. Until people expand
ital pay more and more attention to enterprise ESG performance dis- from short-term effect to long-term effect, the conclusion changes
closure, these have become urgent problems to be solved. when Tobin's Q (TBQ) value is introduced as a measure of the long-
However, few studies have focused on the relationship between term market value of the company. The empirical analysis of Earnhart
ESG performance, financial performance, and company market value at and Lizal (2007) and many other scholars shows that environmental
the same time. Based on the theoretical model, this paper further applied performance has a positive impact on corporate value measured by
the mediation effect empirical method. This paper explores the relation- TBQ value. Nakamura (2011) found through the study of Japanese
ship among ESG performance, financial performance, and market value companies that environment-related investment can significantly
of listed companies and the mediating effect of financial performance in increase corporate value in the long run. Martin and Moser (2016)
the way that ESG performance affects the market value of companies. found in their study that investors would react more positively if a
The innovation of this paper mainly includes the following aspects: company actively disclosed its effect on environmental governance
(1) The company's financial performance is introduced into the analysis rather than the cost of investment. In addition, when Pekovic
framework of the impact of ESG performance on the market value of et al. (2018) studied the impact of environmental performance on
listed companies as an intermediary variable. By constructing linear enterprise market value by taking some listed companies in France as
regression model and mediating effect model, this paper examines the samples, they found an inverted U-shaped relationship, indicating that
impact of ESG performance on the market value of a company and its improving environmental performance to a certain extent can increase
transmission mechanism from several different aspects such as profit- enterprise value, while exceeding this limit will have the opposite
ability, operating capacity, and growth capacity. (2) In this paper, the effect. The research of Hoepner et al. (2020) shows that companies
ESG rating newly developed by SynTao Green Finance in the Wind that take an active role in ESG/corporate social responsibility (CSR),
database is converted to assign values, and a complete data index that especially those that attach importance to the environment, can
can reflect the ESG performance of listed companies is constructed. reduce their downward risks in a crisis. Gerged et al. (2021) examine
(3) On the basis of exploring the relationship among ESG performance, the association between corporate environmental disclosure (CED)
financial performance, and market value of the company, the research and firm value (FV) in the Gulf Cooperation Council (GCC) countries,
objects are further divided into polluting enterprises and non-polluting where CED has been increasing from its previous low base. Findings
enterprises, which makes the research results more detailed, more from a multicountry sample of 500 firm-year observations using a
targeted, and more instructive to the reality. 55-item unweighted environmental disclosure index suggest that CED
The structure of the rest part of this paper is as follows: The sec- is significantly and positively related to FV as measured by TBQ.
ond part is literature review and research hypothesis, combing domes-
tic and foreign literature from ESG performance and financial
performance, ESG performance and company market value, and finan- 2.1.2 | Social responsibility performance and
cial performance and company market value, and putting forward company market value
research hypothesis on this basis. The third part is the research
design, including data description, variable selection, and econometric The existing research on CSR performance and corporate market
model establishment. The fourth part is the analysis of test results. value is mainly based on the theory of stakeholders. Since
The fifth part is the conclusion and enlightenment. Moskowitz (1972) first explored the relationship between the two
through empirical research, there has been not universally recognized
and consistent conclusion. Cochran and Wood (1984) empirically
2 | L I T E R A T U RE R E V I E W A N D R E S E A R C H studied the relationship between CSR and corporate value and found
HYPOTHESIS that CSR performance was significantly positively correlated with
market value. Chen et al. (2001) verified the inhibitory effect of
2.1 | ESG performance and company market value CSR/ESG performance on the downside risk of stock price by describ-
ing the asymmetry of stock return distribution. Mishra and
2.1.1 | Environmental performance and company Modi (2013) use empirical analysis to verify that good CSR can help
market value reduce non-systemic risks. Mervelskemper and Streit's (2017) results
indicate that ESG performance is valued more strongly and in the
First of all, from the perspective of environmental performance, for- (desired) positive direction when firms publish an ESG report,
eign studies on the impact of environmental performance on irrespective of its type (stand-alone or integrated). Fatemi et al. (2018)
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ZHOU ET AL. 3373
find that ESG strengths increase FV and that weaknesses decrease are represented on the board of directors also moderates the corpo-
it. ESG disclosure, per se, decreases valuation. But more importantly, rate ESG financial performance relationship differently.
we find that disclosure plays a crucial moderating role by mitigating Based on the above theories, this paper proposes the following
the negative effect of weaknesses and attenuating the positive effect hypotheses:
of strengths. According to the research results of Albuquerque
et al. (2019), when a company increases product differentiation Hypothesis H1 : The improvement of ESG performance is conducive
through social responsibility investment, the higher the social respon- to enhancing the company's market value.
sibility investment, the lower the systemic risk of the company and
the higher the value of the company. Qureshi et al. (2019) observe a
positive impact of sustainability disclosure and board gender diversity 2.2 | ESG performance and financial performance
on FV, suggesting that the best management practices, enhanced
stakeholder trust, and female representation on boards improve In the existing studies, most literatures focus on one aspect of ESG
FV. We observe that the firms in sensitive industries achieve superior performance, such as environmental performance, social responsibility
social and governance performance. performance, or corporate governance performance, while few litera-
tures study the relationship between the three as a whole of ESG per-
formance and financial performance. Therefore, relevant researches
2.1.3 | Corporate governance performance and mainly focus on the following three aspects:
corporate market value
Corporate governance includes many aspects, such as corporate orga- 2.2.1 | Environmental performance and financial
nizational structure, ownership structure design, board governance, performance
and executive compensation, etc. Relevant researches at home and
abroad have comprehensively covered these aspects. Among them, Most studies on the relationship between corporate environmental
more attention is paid to the company's equity structure and board performance and financial performance show that they are positively
structure. Kyle and Vila (1991) found in his study that if the chairman correlated. Most theoretical analyses believe that enterprises' behav-
of the board of directors of a company concurrently served as a senior ior of improving environmental performance can improve their own
management officer of the company, it would have a negative impact image and gain high social recognition, thus gaining favor from
on the company's operation and ultimately damage the company's upstream and downstream enterprises of the supply chain in the pro-
market value. Through empirical research, Karamanou and cess of enterprise operation, and thus improving their financial
Vafeas (2005) and Petersen (2009) respectively found that a high performance.
shareholding ratio of major shareholders would damage the interests The research on the relationship between environmental perfor-
of minority shareholders, thus damaging the market value of the com- mance and financial performance has a long history. In these studies,
pany. This conclusion also has extremely important guiding signifi- the correlation between environmental performance and financial per-
cance for the ownership structure of listed companies in China. formance was obtained through empirical studies from different per-
Drakos and Bwkiris (2010) studied some Greek listed companies and spectives, different empirical models, and different indicators of
found that management shareholding had a significant positive impact environmental performance and financial performance. Typical studies
on the company's market value. Nekhili et al. (2019) examine the include the following: Feldman (1997), from the perspective of envi-
extent to which the appointment of employees to the board of direc- ronmental control, concluded that the strengthening of environmental
tors influences market perceptions of ESG performance. Research control can improve the operating efficiency of the company without
finds that investors react positively to ESG performance but nega- increasing the cost of environmental management, so as to improve
tively to the presence of employees on the board. In Ionescu the financial performance of the company. Telle (2006) mainly started
et al. (2019), the impact of extra-financial ESG performance on market with pollutants as an environmental performance indicator and
value of the companies was estimated based on a sample of 73 listed pointed out that under the same conditions, enterprises with less pol-
companies, worldwide distributed, during the 2010–2015 period. The lutant emissions would have better financial performance. Through
overall results are consistent with the value enhancing theory empirical study, Sharfman and Fernando (2008) found that enter-
(as opposed with the shareholder expense theory). From the ESG fac- prises' prevention of environmental risks can effectively reduce the
tors, the governance factor seems to have the most important influ- debt cost of enterprises and thus improve their financial performance.
ence on the market value of the selected companies, regardless of the Iwata and Okada (2011) used the data of Japanese manufacturing
geographic region where they are located. Nekhili et al.'s (2021) find- enterprises from 2004 to 2008 to investigate the impact of environ-
ings reveal that labor board representatives act in the opposite direc- mental performance on financial performance. The estimation results
tion to employee shareholder board representatives by focusing show that different environmental performance has different effects
exclusively on improving social performance and reducing environ- on financial performance. Waste discharges do not generally have a
mental and corporate governance performance. The way employees material impact on financial results. On the other hand, greenhouse
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3374 ZHOU ET AL.
gas (GHG) emission reduction leads to an improvement in the financial out that enterprises need to pay a certain low return price to improve
performance of the entire sample and clean industries but has no sig- their CSR performance, which is not in line with the private interests
nificant impact on the financial performance of polluting industries. of senior managers, so it conflicts with business activities that can
Lahouel et al. (2020) employ the panel smooth transition regression improve their financial performance. McWilliams and Siegel (2000)
model to explore the nonlinear relationship between environmental pointed out that the fulfillment of CSR would hinder free market com-
performance and financial performance. Using a panel of 61 French petition and negatively affect the company's investment in other
companies from 2005 to 2017, our results show an inverted-U rela- aspects except social responsibility, thus worsening its financial
tionship and an inverted-V relationship when TBQ and return of performance.
assets (ROA) are respectively used.
However, a few studies believe that the relationship between
environmental performance and corporate financial performance 2.2.3 | Corporate governance performance and
(CFP) is negatively correlated. The main theoretical explanation is that financial performance
environmental problems increase the management cost of enterprises
and reduce CFP. Typical studies, for example, Stanwick (1998), found Corporate governance includes organizational structure, ownership
through empirical analysis that the profitability measured by return on structure design, board governance, and executive compensation.
total assets is positively correlated with the amount of pollution dis- Holderness et al. (1999) studied the “corporate governance crises” in
charged by the company; that is, there is a certain negative correlation Western countries in the 1980s and found that the ownership struc-
between environmental performance and financial performance. ture of a company is highly correlated with the financial performance
Horváthová's (2010) research results suggest both that the empirical of a company and the concentration of ownership can significantly
method used matters for the nexus and that the likelihood of finding a affect the financial performance of a company. From the perspective
negative link between environmental and financial performance signif- of board independence, Lefort and Urzua (2008) found that the more
icantly increases when using simple correlation coefficients instead of independent the board, the better the financial performance of the
more advanced econometric analysis. company. Xie et al. (2019) applied data envelopment analysis to esti-
mate corporate efficiency and investigated the nonlinear relationship
between corporate efficiency and ESG disclosure. Evidence shows
2.2.2 | Social responsibility performance and that corporate transparency regarding ESG information has a positive
financial performance association with corporate efficiency at the moderate disclosure level,
rather than at the high or low disclosure level. Governance informa-
The research on whether CSR can improve financial performance has tion disclosure has the strongest positive linkage with corporate effi-
always been a hot topic. Similar to the research on environmental per- ciency, followed by social and environmental information disclosure.
formance, most of the research views are positively correlated, a few are Velte (2017) finds that ESG performance has a positive impact on
negatively correlated, and a few are irrelevant or conditional correlated. ROA but no impact on TBQ. Furthermore, by analyzing the three dif-
Typical studies with positive correlation include the following: ferent components of ESG performance, corporate governance per-
Inoue and Lee (2010) divided CSR performance into employee rela- formance has the strongest impact on financial performance in
tions, community relations, and diversity and found that all these five comparison to environmental and social performance. Tampakoudis
aspects had a significant positive impact on CFP through the study of and Anagnostopoulou (2020) explore the effect of ESG performance
367 tourism enterprises. Mallin et al. (2014) took 90 banks in on market value and performance in the context of mergers and
13 Islamic countries as research objects and proved that CSR perfor- acquisitions and examine whether acquisition of targets with better
mance had a significant positive impact on CFP owners represented ESG performance can help acquirers to increase their own ESG per-
by return on total assets. Maqbool and Zameer's (2018) results indi- formance and whether the market values the increased ESG perfor-
cate that CSR exerts positive impact on financial performance of the mance positively.
Indian banks. The finding of this study provides great insights for man- From the theoretical level, there are several theories that ESG
agement, to integrate the CSR with strategic intent of the business performance influences financial performance: First is the theory of
and renovate their business philosophy from traditional profit- sustainable development. In order to achieve sustainable develop-
oriented to socially responsible approach. Lin et al. (2019) study found ment, the enterprise strives to increase the level of green environ-
that better financial performance of firms lead to a better CSR mental protection management and pay attention to ESG
engagement and better CSR need not necessarily lead to superior performance management, so that the enterprise can grow in a
CFP. Pekovic and Vogt's (2021) findings indicate that while board size healthy and benign way and improve its financial performance. One of
and gender diversity moderate the CSR-firm's financial performance the most direct possible ways is for enterprises to invest in technolog-
link positively, CSR interacting with ownership concentration nega- ical innovation related to pollution control and adopt environmental
tively impacts a firm's financial performance. protection strategies. This effectively reduces the pollutants dis-
Negative correlation studies are generally based on stakeholder charged by enterprises and improves the production efficiency, thus
theory and agency theory. The school represented by Friedman points strengthening the market competitiveness of products and enhancing
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ZHOU ET AL. 3375
the market share, which is ultimately reflected in the improvement of the regression analysis by Ball and Brown (1968) on the profitability
the financial performance of enterprises. The other is resource-based indicators of some companies listed on the New York Stock Exchange
theory. There are similarities between resource-based theory and sus- and their stock prices over a period of time, and the study found that
tainable development theory. This theory points out that enterprises the two are highly correlated. Further, Beaver et al. (1979) compared
have various forms of resources and capabilities, which are the funda- the correlation between these indicators of profitability and stock
mental reason for enterprises to maintain lasting competitive advan- price with that of operating cash flow and stock price and found that
tages (Wernerfelt, 1984). For example, in terms of environment, in the the former was more correlated than the latter. On the basis of this
face of environmental pressure, enterprises' input in environmental result, Bernard and Stober (1989) found that the correlation between
management and new environmental protection technologies is an corporate value and profitability was higher for companies with long
important resource for enterprises to gain competitive advantages, business cycles and companies in the growth stage. In addition, Barth
while financial performance is a key result of resource output (Russo et al. (2001) found that both book value and net income of assets and
& Fouts, 1997). Resource-based theory intuitively explains that ESG liabilities are factors influencing market value, and assets are posi-
performance as a resource can improve the company's output and tively correlated with market value, while liabilities are negatively cor-
bring good financial performance to the company, as well as reduce related with market value.
the probability of environmental accidents such as pollution. Third is From the theoretical level, there are two main theories that
information asymmetry theory. On the premise of sustainable devel- financial performance affects the company's market value: One is
opment theory and resource-based theory, asymmetric information absolute valuation theory, and the other is relative valuation theory.
theory further explains the positive impact of ESG performance on Absolute valuation theory is the most accurate theory to estimate
financial performance. Porter and Vanderlinde (1995) demonstrated the intrinsic value of a company, but it is not as practical as relative
the environmental performance and believed that the environmental valuation theory due to the fact that indicators such as discount rate
performance of an enterprise was a valuable resource that could not cannot be predicted exactly and there are many factors to be consid-
be imitated. It met the expectation of the public and society, so it was ered and the model is complicated. In short, for listed companies,
conducive to expanding the operating income and profit of the enter- regularly available financial performance data allow people to use
prise and finally realizing the win–win situation of environmental pro- these valuation theories to calculate the intrinsic value of the com-
tection and competitiveness of the enterprise. pany. The second is the efficient market hypothesis. Fama (1970) for-
To sum up, this paper subdivides financial performance into prof- mally proposed the efficient markets hypothesis, arguing that in a
itability, operating capacity and growth capacity, thus proposing the capital market with perfect institutions in all aspects and smart and
second set of research assumptions: rational investors, all valuable information has been fully reflected in
the current stock price of a company. It is impossible for anyone to
Hypothesis H2a : The improvement of ESG performance is conducive make excessive profits by analyzing this information. In other words,
to the improvement of profitability. the intrinsic value of all investors calculated by absolute or relative
Hypothesis H2b : The improvement of ESG performance is conducive valuation theory is equal to market value. Therefore, no matter in
to the improvement of operational capacity. developed markets or emerging markets, the market value of a com-
Hypothesis H2c : The improvement of ESG performance is conducive pany is significantly positively correlated with its financial perfor-
to enhancing growth capacity. mance represented by profitability.
Based on the above analysis, we believe that ESG performance,
supported by sustainable development theory and resource-based
2.3 | Financial performance and company market theory, may have a positive impact on CFP, which is further strength-
value ened in signal transmission theory. Based on financial performance,
investors calculate the intrinsic value of a company through absolute
For a long time, research on the relationship between financial perfor- or relative valuation theory. Finally, under the guidance of “weak effi-
mance and market value of listed companies has been concerned. cient market hypothesis,” they promote the regression of market
From different perspectives, scholars have conducted a comprehen- value through long-short behavior. ESG performance ultimately
sive empirical analysis of profitability, operational ability, and develop- affects the company's market value through a series of ways, while
ment ability in financial performance, providing a systematic reference financial performance can be regarded as an intermediary variable of
for future research. The classification of financial indicators mainly ESG performance affecting the company's market value in the whole
includes four aspects: profitability, operating capacity, solvency, and process, as shown in Figure 1 for the specific process.
development capacity. As for the measurement of market value, some Based on the above logical deduction and based on the classifica-
scholars directly use stock price or current market value, and more tion of the second set of hypotheses, the third set of hypotheses is
scholars use TBQ as a stable index to measure market value further proposed:
(Wernerfelt & Montgomery, 1988).
Since profitability is the core of an enterprise, there are many Hypothesis H3a : Profitability is one of the ways ESG performance
research on profitability and corporate value. The earliest study was affects the market value of the firm.
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3376 ZHOU ET AL.
Hypothesis H3b : Operational capability is one of the ways that ESG's detailed analysis, discuss the listed company ESG performance impact
performance affects a firm's market value. on the company's market value of the possible financial performance
Hypothesis H3c : The ability to grow is one of the ways that ESG per- path. Second, the company's financial performance is systematically
formance affects the market value of the firm. divided into profitability index, operation ability index, and growth
ability index and so on to construct reasonable intermediary variables,
To sum up, the existing research has made breakthroughs in many respectively. Through the empirical analysis of the mediating effect
aspects and achieved many valuable results, which are also the impor- model, this paper discusses whether the ESG performance of listed
tant basis of this project research. However, the existing research still companies will affect the market value of the company, what kind of
has the following shortcomings: First, most of them only focus on a financial performance will play a mediating role, and the degree of the
certain aspect of ESG performance, rather than comprehensive con- mediating role. The third is to construct the FINANCIAL performance
sideration; second, many studies focus on the relationship between oriented ESG performance management method based on the conclu-
ESG performance, CFP, and market value, but do not explore how sions of theoretical and empirical analysis, and put forward practical
ESG performance affects corporate value, and whether CFP plays a suggestions from the government, enterprises, and investors.
mediating role in this process is basically not involved. Therefore, this
paper will carry out research from the following three aspects: First,
through theoretical analysis, discuss the ways that ESG performance 3 | STUDY DESIGN
of listed companies affects the company's financial performance and
the way that the company's financial performance affects the comp- In order to further test ESG performance, financial performance, and
any's market value. From the capital market signal transmission the- the relations between and among the company's market value, we
ory, sustainable growth theory, and other aspects of in-depth and select the relevant data of listed companies, select the relevant
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ZHOU ET AL. 3377
indicators, construct an empirical model, whether there is the relation- 3.2.2 | Explanatory variable: ESG performance
ship between test three, and verify whether the financial performance
in ESG performance influence a company's market value plays an This paper selects the ESG rating system of A-share listed companies
intermediary role in the way. published by SynTao Green Finance in 2020 and quantifies the rating
into corresponding numerical grades as A variable of ESG perfor-
mance. SynTao Green Finance conducts its own evaluation based on
3.1 | Sample selection and data sources esG-related information such as social responsibility reports disclosed
by enterprises and in comparison with relevant international and
In view of the actual situation in China and the availability of ESG rat- domestic rules, standards, and best practices. The evaluation results
ing data, this paper adopts the ESG rating data developed by SynTao were then weighted according to the substantive factors of ESG in
Green Finance, which can be obtained from Wind database, as the different industries, and the ESG rating was finally divided into
data to measure the ESG performance of listed companies. 10 grades: D, C, C, C+, B, B, B+, A, A, and A+. Referring to the
This paper selects the data of some listed companies in Shanghai investment grade and non-investment grade rating methods of Stan-
and Shenzhen A-share markets from 2014 to 2018 as samples. These dard & Poor's and Moody's, this paper quantifies the ESG perfor-
listed companies normally released their annual financial information mance of companies with a rating of B+ or above as 1, indicating that
during the selected period, circulated normally in the A-share market they have a better ESG performance. The rest of the rating B and
and became the ESG rating object tracked by SynTao Green Finance. below are quantified as 0, indicating enterprises with poor ESG
In order to make the research results more accurate, the following performance.
measures are taken to further screen the samples of these listed
companies:
3.2.3 | Mediating variable: Financial performance
1. Remove companies with “special treatment” or “delisting warning”
(ST, *ST). Financial performance is divided into profitability index, operating
2. Eliminate the samples with missing data. After the above screen- ability index, and growth ability index by type. Financial performance
ing, a total of 835 valid data sets were obtained for is divided into profitability indicators, operational indicators, growth
167 companies. indicators, and solvency indicators. Among them, solvency refers to
the bearing capacity or guarantee degree of an enterprise to repay
Amid these, the relevant data to measure the ESG performance maturing debts, which has little relation with ESG index, so it is no
of enterprises comes from the ESG rating data of A-share listed longer considered in this paper. According to existing studies, we
companies developed by SynTao Green Finance in the Wind data- select the most commonly used return on equity (ROE), total asset
base. TBQ data of listed companies over the years came from turnover (TAT) and net profit growth (Growth) of listed companies as
CSMAR database. Financial or other data of listed companies mainly the corresponding financial performance indicators.
come from Wind financial terminal. Excel software was used to Return on equity is the percentage of net profit to average share-
screen and standardize the relevant raw data in this paper, and holders' equity, which is used to measure the efficiency with which a
Stata14.0 software was used to complete the regression and test of company uses its own capital. This index reflects the ability to obtain
the relevant models. net income of own capital. The higher the index value, the higher the
return on investment. Total asset turnover ratio is the ratio of sales
revenue and average total assets of an enterprise in a certain period,
3.2 | Variable design which has good applicability to companies in most industries. It
reflects the efficiency of all assets of an enterprise in this period from
3.2.1 | Explained variable: Market value of the investment to economic benefit. The higher the total asset turnover
company ratio is, the stronger the operating capacity of the enterprise is. Net
profit growth rate is to point to the enterprise current net profit than
The market value of a company is measured by TBQ. TBQ value is the the growth range of the previous period net profit, the larger the
ratio of an enterprise's stock market value to its total replacement index value represents the enterprise growth ability is stronger.
cost. TBQ value (TBQ) = (year-end market value of tradable shares +
year-end market value of non-tradable shares + year-end market
value of net liabilities)/year-end total assets, as defined in the GTAI 3.2.4 | Control variables
database. This definition fully reflects the expectations of investors
such as equity owners and creditors on the value of the company's Referring to previous studies, we selected company size (Size) and
overall assets and is an effective method to measure the market value financial leverage (Lev) as control variables. In previous studies on the
of a company. correlation between internal attributes of enterprises, firm size is an
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3378 ZHOU ET AL.
essential control variable to be considered. Because the larger the It should be noted that when the return on total assets index is
company is, the more obvious the scale effect will be, and the more used as an intermediary variable in the study, the total asset turnover
sensitive the enterprise may be to improve its financial performance rate and net profit growth rate to be studied are also likely to have an
through corporate governance and other means. Therefore, for com- impact on the explanatory variable and the explained variable, so they
panies of significantly different sizes, their willingness to manage ESG should also be used as control variables. Similarly, when the total asset
performance and the economic results can be significantly different. turnover rate is used as a mediating variable, the rate of return on
Based on this, we take company size as one of the control variables. total assets and the growth rate of net profit are used as control vari-
Financial leverage, also known as financing leverage, reflects the ables; when the growth rate of net profit is used as a mediating vari-
extent to which a company uses debt financing tools. We use leverage able, the rate of return on total assets and the total asset turnover
as a measure of financial leverage, measured by the ratio of a comp- rate are used as control variables.
any's average annual total liabilities to its average annual total assets. In addition, considering that the market value of enterprises mea-
For companies using different financial leverage, their business strate- sured by TBQ will be affected by the overall economic situation, the
gies and risk preferences will vary, so the management style of ESG economic situation variable (per capita gross domestic product [GDP])
performance may also be different. Based on this, we also take is added as a control variable. It's measured by total GDP output
finance as one of the control variables. divided by total population.
Ownership concentration (Top1) refers to the quantitative index Specific variable selection and definition are shown in Table 1.
of ownership concentration or dispersion shown by all shareholders
due to their different shareholding proportions. Ownership concentra-
tion is the main index to measure the state of ownership distribution 3.3 | Model building
of a company, as well as the stability of the company and the struc-
ture of the company. It is influenced by the size of the firm, the per- In order to test the hypotheses proposed above, this paper firstly
formance of the firm, the control preference of the owner, and the establishes the relationship models of the impact of ESG perfor-
political power. In this paper, the shareholding ratio of the largest mance on financial performance and corporate market value respec-
shareholder is used to measure. tively. Then, following the three-step method proposed by Baron
The ratio of cash to total assets (CF) refers to the ratio of cash and Kenny (1986) to test the mediating effect, financial perfor-
assets to current assets. Cash assets include cash, interbank deposits, mance variables were added into the latter model, and the changes
and central bank deposits. Liquid assets are also called reserve assets, of regression results were observed again to verify the mediating
including cash assets and short-term securities. The higher the cash effect. The financial performance of this paper mainly includes three
assets ratio is, the higher the liquidity of the bank is and the higher aspects: profitability, operation ability, and growth ability. Therefore,
the protection degree for creditors is. This paper is measured by cur- three groups of corresponding models were divided into empirical
rent net cash flow/year-end total assets. tests.
3.3.1 | Performance, profitability, and company mediating effect model in the study of Baron and Kenny (1986), the
market value testing steps of the mediating effect of profitability in this paper are
as follows:
First, the model of the impact of ESG performance on the company's First, Model (1) is used for regression analysis of ESG perfor-
market value is constructed: mance and the company's market value to test whether the regres-
sion coefficient α11 is significant. If so, the next step will be taken; if
TBQit ¼ α10 þ α11 ESGit þ α12 Sizeit þ α13 Levit þ α14 TAT it ð1Þ not, the test will be stopped. Then, Model (2) is used for regression
analysis of ESG performance and profitability. If the regression coeffi-
þα15 Growthit þ α16 Top1it þ α17 CFit þ α18 gdpit þ ε1it ,
cient α21 is significant, it indicates that ESG performance can indeed
affect profitability; if not, the test is stopped. Finally, as shown in
where is the TBQit value of company i in year T, α10 is a constant term Model (3), the profitability variable is added into Model (1). If under
and ε1it is a residual term, and α11 represents the influence coefficient the new model, the coefficient of ESG performance is still significant
of ESG performance on company value; α12–α18 represent the influ- while the coefficient of profitability variable α32 is significant, and
ence coefficient of each control variable on company value. If α11 is decreases relative to the coefficient α11 , it indicates that there is a
significantly positive, then the hypothesis H1 is verified; that is, the partial mediation effect. If the coefficient of the profitability
improvement of ESG performance is conducive to enhancing the variable α32 is significant but the coefficient of the ESG performance
company's market value. variable α31 becomes insignificant, then there is a complete mediating
Second, the model of the impact of ESG performance on profit- effect. Thus, we test the hypothesis H3a that profitability is one
ability is constructed: of the ways that ESG performance affects the company's market
value.
ROEit ¼ α20 þ α21 ESGit þ α22 Sizeit þ α23 Levit þ α24 TAT it ð2Þ
TAT it ¼ β20 þ β21 ESGit þ β22 Sizeit þ β23 Lev it þ β24 ROEit ð5Þ
TBQit ¼ α30 þ α31 ESGit þ α32 ROEit þ α33 Sizeit þ α34 Levit
þβ25 Growthit þ β26 Top1it þ β27 CFit þ β28 gdpit þ ϵ2it ,
þα35 TAT it þ α36 Growthit þ α37 Top1it þ α38 CFit þ α39 gdpit þ ε3it ,
ð3Þ
TBQit ¼ β30 þ β31 ESGit þ β32 TAT it þ β33 Sizeit þ β34 Lev it þ β35 ROEit ð6Þ
In the formula, TBQit is TBQ for firm i in year t. Growthit is the When the independent variables in the model have strong
net profit growth rate of company i in year t, and γ 10 , γ 20 , and γ 30 are multicollinearity, it will affect the reliability of the analysis results of
constant terms; θ1it , θ2it , and θ3it are the residual term, γ 11 represents the mediation effect model. Statistical methods to test
the influence coefficient of ESG performance on the company's mar- multicollinearity include Pearson correlation test and variance inflation
ket value, γ 21 represents the influence coefficient of ESG performance coefficient (VIF) test. This paper adopts Pearson correlation test to
on net profit growth rate, and γ 12–γ 39 represents the influence coeffi- test all variables in the model, and the test results are shown in
cient of each control variable on the company's market value. If γ 11 is Table 3.
significantly positive, the hypothesis H1 is verified; that is, the It can be seen from Table 3 that the absolute value of correlation
improvement of ESG performance is conducive to enhancing the coefficient between variables is 0.635 at most. Statistically, it is gener-
company's market value. If γ 21 is significantly positive, it verifies ally believed that serious multicollinearity may occur only when the
the hypothesis H2c that the improvement of ESG performance is correlation coefficient between independent variables exceeds 0.8.
conducive to the improvement of the company's growth Therefore, there is no serious multicollinearity problem among vari-
capacity. The inspection procedure is the same as the previous ables in the model constructed in this paper, and the model regression
section. analysis can be carried out in the next step.
Variables Variable code Sample size Mean value The standard deviation Minimum The maximum
ESG performance ESG 1002 0.172 0.377 0 1
Return on equity ROE 1002 13.22 10.03 46.10 133.1
Total asset turnover TAT 1002 0.544 0.468 0.0224 2.582
Net profit growth rate Growth 1002 0.360 2.366 11.34 35.19
The market value TBQ 1002 1.857 1.512 0.771 14.09
The enterprise scale Size 1002 10.14 7.239 1.776 31.00
Financial leverage Lev 1002 0.588 0.227 0.0341 0.945
Ownership concentration Top1 1002 0.373 0.165 0.0541 0.863
Ratio of total cash assets CF 1002 0.0162 0.0678 0.276 0.484
GDP per capita gdp 1002 10.95 0.145 10.75 11.16
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ZHOU ET AL. 3381
Variables ESG TBQ ROE TAT Growth Size Lev Top1 CF gdp
ESG 1
TBQ 0.175*** 1
ROE 0.138*** 0.333*** 1
TAT 0.062** 0.193*** 0.165*** 1
Growth 0.018 0.055* 0.112*** 0.015 1
Size 0.184*** 0.173*** 0.087*** 0.101*** 0.023 1
Lev 0.132*** 0.604*** 0.132*** 0.341*** 0.011 0.194*** 1
Top1 0.021 0.117*** 0.034 0.180*** 0.000 0.011 0.112*** 1
CF 0.065** 0.135*** 0.209*** 0.021 0.228*** 0.043 0.036 0.037 1
gdp 0.210*** 0.080** 0.119*** 0.030 0.031 0.635*** 0.009 0.078** 0.143*** 1
4.3 | Regression analysis of the relationship relationship between ESG performance and market value of the com-
between ESG performance, financial performance, and pany. However, when profitability, operating capacity, and growth
company market value capacity are also used as control variables, ESG performance of a
company is significantly positively correlated with market value, which
4.3.1 | ESG performance, profitability, and company verifies the theoretical hypothesis H1 . As shown in Model (2), there is
market value no significant relationship between a company's ESG performance
and its profitability, thus rejecting the theoretical hypothesis H2a and
First, Hausman test was used to select fixed effect model or random overturning the theoretical hypothesis H3a that the impact of a comp-
effect model, as shown in Table 4. All the test results reject the null any's ESG performance on market value is not dependent on the
hypothesis at the significance level of 1%, so the fixed-effect model mediating role of its profitability.
should be selected. It should be noted that SynTao Green Finance releases the rating
As can be seen from the regression results in Table 4, when prof- of the company's ESG performance of the previous year in the middle
itability is not used as a control variable, there is no significant of each year, so all the other variables in Models (1)–(3) are essentially
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3382 ZHOU ET AL.
one stage behind the ESG variables. This eliminates the possibility of important channel for the company's ESG performance to affect mar-
bidirectional causality when the ESG variable is the key explanatory ket value.
variable. On the other hand, we selected the TBQ value is at the end
of the current market and at the end of the sum of net debt divided
by the end of the definition of net assets is representative of the final 4.3.3 | ESG performance, growth ability, and
point of enterprise value, while the financial performance indicators company market value
variable reflects the average ability of the whole year, so could not
exist two-way causal relationship between them. Therefore, the First of all, the Hausman test was still used to select the fixed effect
regression results in Table 4 do not have endogeneity problems cau- model or the random effect model. The test results still rejected the
sed by causal inversion. On the other hand, the fixed effect model is null hypothesis at the significance level of 1%, so the fixed effect
adopted in the regression of the model, which can partially solve the model was still selected, as shown in Table 6. As can be seen from the
endogeneity problem caused by omitted variables. In summary, the regression results in Table 6, the ESG performance of the company is
regression results in Table 4 are valid. significantly positively correlated with the market value of the com-
pany, thus verifying the theoretical hypothesis. However, the relation-
ship between ESG performance and growth ability in Model (8) is not
4.3.2 | ESG performance, operational capability, significant, so the theoretical hypothesis is denied; that is, the
and company market value improvement of ESG performance of a company cannot significantly
affect the growth ability of the company.
Same as the test procedure in the previous section, Hausman test is Based on the above empirical analysis results, it can be seen that
first used to select the fixed effect model or random effect model. See the improvement of ESG performance of listed companies is condu-
Table 5 for the results. As can be seen from the regression results in cive to the improvement of the company's operating capacity, but the
Table 5, the ESG performance of the company is significantly posi- effect on the company's profitability and growth capacity is not obvi-
tively correlated with the market value of the company, thus verifying ous. The improvement of ESG performance of listed companies is
the theoretical hypothesis H1 . In addition, there is a significant posi- conducive to enhancing the market value of the company, and operat-
tive correlation between ESG performance and operating capacity, ing capacity is one of the important ways that ESG performance
which verifies the theoretical hypothesis H2b . When the two variables affects the market value of the company.
of ESG performance and operating capacity of the company are put
into the same model (Model 6), the regression coefficients of ESG per-
formance and operating capacity are significant. This means that the 4.4 | Robustness test
impact of the company's improvement of ESG performance on market
value is partly caused by operating capacity. The regression results Therefore, in order to verify the robustness of the previous conclu-
verify the theoretical hypothesis that operating capacity is an sion, we replaced TBQ, which measures the company's market value,
Variables PB TAT PB
ESG 0.4209** (2.55379) 0.0627* (1.67340) 0.3736** (2.15043)
TAT — — 0.2540* (1.72665)
ROE 0.1067*** (3.05765) 0.0072*** (5.19551) 0.1246*** (19.18799)
Growth 0.0368 (0.57548) 0.0071 (1.21330) 0.0441 (1.63305)
Size 0.0270*** (4.30606) 0.0924*** (7.75073) 0.8486*** (14.93707)
Lev 7.6371*** (3.46883) 0.0400 (0.41038) 0.1032 (0.22896)
Top1 1.3972 (1.03454) 0.6742*** (7.66410) 0.2196 (0.52425)
CF 1.3613* (1.77284) 0.4704** (2.24234) 3.0624*** (3.14773)
gdp 3.2466*** (6.06331) 4.2334*** (7.46503) 38.2159*** (14.17312)
Constant term 32.8709*** (5.14867) 44.6288*** (7.33836) 403.2759*** (13.95896)
Sample size 1002 1002 1002
Fixed effects Yes Yes Yes
with PB valuation (data from Wind financial database), and conducted enterprises, as relatively pure market participants, are mainly moti-
regression on Models (4)–(6) again. The regression results are shown vated to improve ESG to obtain economic returns and pursue profit
in Table 7. As can be seen from Table 7, the mediating effect of oper- maximization. In contrast, the ESG practices of state-owned enter-
ating capacity still exists, so the index selection of operating capacity prises are more concerned with institutional, policy factors, and social
in this paper is robust. repercussions. In addition, state-owned enterprises performance of
social responsibility is often regarded as their “duty,” and they face
4.5 | Further study higher public pressure and social expectation in terms of ESG perfor-
mance, which results in low market response to the improvement of
Generally, the driving factors for improving ESG of listed companies state-owned enterprises' ESG performance. Considering the differ-
with different property rights are different. Non-state-owned ence of property rights, according to the nature of the actual
3384
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ZHOU ET AL. 3385
controller of enterprises, the samples are divided into state-owned and practice of ESG investment at the buying end, and strengthen the
enterprises and non-state-owned enterprises. A total of 528 non- development of related products based on ESG investment concept
state-funded companies and 474 state-funded companies were at the sales end. For individual investors, with the improvement of
obtained, and they were substituted into Models (4)–(6), respectively. China's capital market information disclosure system, they can incor-
The test results are shown in Table 8. porate ESG information disclosed by companies and ESG rating into
It can be found from Table 8 that, first of all, different from the their investment strategies, make full use of the ability and advantages
results in Table 5, for the sample of listed companies with non-state- of ESG rating to select high-quality companies, and improve their own
owned background, the effect of ESG index on company value is no assets' ability to resist risks and stabilize returns.
longer significant when the ESG index and operating capacity index
are controlled at the same time. It can be seen that for the samples of OR CID
listed companies with non-state-owned assets, the impact of ESG Guangyou Zhou https://orcid.org/0000-0001-9466-1851
index on the company value is realized through the operating capacity Sumei Luo https://orcid.org/0000-0001-6400-8093
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