Frontiers in Business, Economics and Management ISSN: 2766-824X | Vol. 11, No. 1, 2023 245 Corporate Sustainability and Firm Value: Evidence from China Yiqi Yang Hunan Agricultural University, Changsha, Hunan, China Hauyangyiqi@163.com Abstract: In recent years, sustainable development has become a hot topic globally, and more and more people are realizing the crucial importance of environmental, social, and governance (ESG) factors in corporate decision-making and long-term development. Using the sample from China, we testify whether corporate sustainability have effect on firm value. We find that corporate sustainability improves firm value, as it reduces the information risks and operating risks. ESG is a win-win measure for both regulators and listed firms, therefore there is a shared interest in ensuring that ESG considerations are integrated into business practices. In theory we enrich the literature on the economic conse-quences of corporate sustainability and complement to the literature on deter-minants of firm value. In practical significance, this study provides implica-tions for both government and listed firms to focus on ESG. Keywords: ESG; Corporate Sustainability; Corporate Value; Tobin’s Q. 1. Introduction In recent years, there has been extensive discussions and researches on how to achieve sustainable development, and the United Nations has been advocating for countries to collectively focus on climate issues and strengthen climate governance. The concept of ESG was first introduced in 2004, and the trend of disclosing ESG reports by companies gradually formed in the following decade. ESG contains three dimensions of information: environment, society, governance. Environments information has drawn regulators’ attention, as the climate risk is getting more serious. Society relates to the responsibility the firm take to the whole society, such as the responsibility of employment, charity. Governance are focuses on the corporate strategy and operation. Stock market performance of a firm is reflected by the return rate and the volatility. As the good firm is matched to a higher share price, the capital allocation is effective in an effective market. Previous studies have already researched the impact of ESG on analysts' earnings forecast accuracy, firm performance, market value [1]-[3]. Existing literatures document that firm size and industry influence ESG performance [4],[5]. While literatures of the stock market performance showed that democracy, political risks and corporate governance have effects on stock market performance [6],[7]. In this paper, we testify whether the ESG ratings have effect on the firm stock market performance using the sample from China and OLS (ordinary least squares) to evaluate the goodness of fit and predictive ability of the regression model. We find that ESG ratings significantly improve the firm stock market performance. ESG impacts on stock market performance by reducing the information risk and operation risk. In theory we enrich the literature on the economic consequences of corporate sustainability and complement to the literature on determinants of firm value. In practical significance, this study provides implications for both government and listed firms to focus on ESG. Government officials should strengthen their attention and support for sustainable development, promote the development and implementation of relevant laws and policies, encourage companies to take social responsibilities, improve their ESG performance, and promote sustainable development. Companies should realize the importance of ESG to their long-term development and value creation, incorporate it into their corporate strategy and business decision-making, establish related ESG management systems and policies, strengthen the collection and disclosure of ESG data, enhance transparency and trustworthiness, and increase market competitiveness. The paper can be organized as follows. Section 2 presents literature review, while section 3 develops hypotheses. Section 4 demonstrates the research design. Section 5 discusses the baseline empirical results. 2. Literature Review 2.1. Literature Review on ESG Previous studies have documented the economic consequence of ESG. Buallay documents that ESG disclosure has a positive effect on firm’s financial and operational performance [2]. ESG disclosure includes three dimensions: environment, society, governance. In environmental dimension, the ESG disclosure has positive effect on return on assets (ROA) and tobin’s Q(TQ). ESG performance ascension of listed company improves the firm’s market value. Company’s financial performance has obvious intermediary role. The operational capacity is also a vital intermediary role [3]. Incorporate ESG into investment appraisal creates a better decision-making. And the best situation depends on fund manager’s preference and deviate from the fund manager has not basis [8]. Firms with ESG concerns benefits from ESG related disclosure. But when they increase the disclosure, firm with ESG strength suffer lower value estimate [9]. Shakil documents that ESG disclosure has a negative effect on financial risks. Firm performs reasonably on ESG has lower total risk [10]. As for the determinants of ESG, firm scale, availability of ESG data the firm provide has a positive effect on the firm’s ESG performance [4]. Sensitivity industries perform better in 246 environment dimension of ESG. Systematic risk and ESG performance relationship assume the inverted u-shaped curve. Firm’s negative profitability is associated with the environmental performance [5]. 2.2. Literature Review on Stock Market Performance Previous studies have documented the determinants of stock market performance. There is a parabolic relationship between level of democracy and political risk. And the political risk has a positive effect on the equity return [6]. Governance institutions environment has a positive effect on stock market performance. Quality of governance has a negative effect on total risk and specific risk [7]. The better ESG performance of a firm, the higher stock returns of a firm, and the lower stock volatility. As to the influence channel, the firm with better ESG performance often has a better performance in financial performance, quality of earnings and investment efficiency, which is the reason of better stock market performance [11]. Further study shows that shareholder responsibility, environmental responsibility and social responsibility have positive effect on stock market performance, while stuff responsibility, supplier responsibility, customer responsibility and consumer’s right and interest have negative responsibility on financial performance. 3. Hypotheses Development ESG expresses more information of the firm to investors. ESG provide to investors more non-financial and financial information, mitigating the information asymmetry. Firm with strengths in ESG can send out optimistic information to externals, and investors can understand the firm’s advantage better. As the investor’s confidence on the firm improved, they may increase the investments of the firm and the externals will hold optimistic attitude to the firm, which reflects on stock market higher share prices and return rate in effective market. And the share will be less volatile, and be more steadily increased. ESG factors have a significant impact on the operation of a company. According to Henriksson et al. (2019), companies with better ESG scores tend to have lower equity capital costs and higher credit ratings [12]. This is because investors require a higher return when information transparency is low, and ESG provides more information to investors. Therefore, companies with better ESG performance can enjoy a lower cost of capital and a better reputation among investors. Moreover, Luo et al. (2022) demonstrate that incorporating ESG information into the forecast process can improve analysts' earnings forecast [1]. This is because external stakeholders can better monitor the company's management actions and governance practices, which reduces the likelihood of earnings management and improves earnings quality. Companies with better ESG performance also tend to follow good business ethics and regulations, which is good for the long-term development of the firm. As a result, the risk of stock failure is reduced, and the image, reputation, and goodwill of the company improve. As managements and those in charge of governance strive to improve the effectiveness of governance, they can avoid the misuse of capital and improve the efficiency of investment appraisal. This, in turn, leads to better financial and operational performance, resulting in improved profitability and earnings, and reducing operational risks. By adopting ESG strategies, companies can also gain a competitive advantage and foster innovation, as they are better able to meet the needs of socially conscious consumers and stakeholders. Moreover, companies with better ESG performance are more attractive to socially responsible investors. Verheyden et al. (2016) show that incorporating ESG information into each investment method can facilitate better decision-making [8]. The optimal allocation depends on the fund manager's preference and willingness to deviate from the benchmark before screening. These investors tend to consider a company's social and environmental impact, as well as its financial performance, when making investment decisions. Therefore, companies with better ESG performance are more likely to attract socially responsible investors, which can lead to increased demand for their shares and a higher valuation of their stock. In summary, we argue that ESG information strengthen the firm’s stock market performance by reducing the information and operating risks. Based on the above analyses, this study proposes the following hypothesis. Hypothesis 1: firm ESG factor improves the stock market performance. 4. Research Design 4.1. Sample and Data Sources Our sample consists of all Chinese listed firms on Shanghai and Shenzhen stock exchanges during the period of 2009- 2020. Our sample starts from 2009 because ESG rating of Sino-Securities Index began to rate in 2009, and the newest data is updated in 2020. We exclude: (1) firms in financing industry as they have different regulation environment and accounting reporting regulations. (2) firms with financial difficulties and listing suspension (ST). Observations are 32044. The data of financial and corporate governance are obtained from CSMAR Database. The ESG data are from Sino-Securities Index, Wind Database. 4.2. Variance Definition Independent Variables. Following the previous study (Luo and Wu, 2022) [1], we use CSI ESG rating (ESG) as the proxy of ESG fulfilment. The CSI ESG rating system is based on international mainstream methods and practical experience, as well as the core tenets of international ESG, combined with China's national conditions and the characteristics of the capital market, from the three dimensions of environmental, social and corporate governance. This score captures how firms report their ESG initiatives along 16 indicators and 44 sub-indicators, and use 9 ratings from C to AAA scoring the firms’ performance. AAA indicates best ESG rating. We acknowledge that there is a divergence between different ESG ratings provided by distinct rating organizations. Dependent Variables. Following Buallay (2019)’s study [2], this paper uses Tobin’s Q (TobinQA; TobinQB; TobinQC; TobinQD) as the proxy of stock market performance of firms. Tobin's Q is the ratio of the market value of capital to its replacement cost. The higher of the value of Tobin’s Q, the better performance of stock market. Control Variables. In line with extant literature (Francis et al, 2019; Wang et al, 2017) [13] [14], this paper controls for firm size(size), firm leverage (lev), proportion of operation 247 cash flow (cfo), mortgage ability (PPE), board of director size (board), Independence of board of directors (indep). The higher of ratio, the more independence of firm board of directors. Table 1. Variable Definition. Variable Type Variable Name Variable Value Description Explained Variables TobinQA Market value A/ total assets; When the denominator is not published or is zero or less than zero, it is indicated as NULL. TobinQB Market value A/ (total assets - net intangible assets - net goodwill) TobinQC Market value B/ total assets TobinQD Market value B/ (Total assets - net intangible assets - net goodwill) Explanatory Variables ESG C;CC;CCC;B;BB;BBB;A;AA; AAA Control Variables Size Natural Logarithm of the total assets of the company PPE The net value of the original price of fixed assets after deducting accumulated depreciation and impairment provisions for fixed assets. Cfo Operating cashflow/ total assets lev Total liabilities/ total assets Indep numer of non-executive directors/ number of total directors. Board Natural logarithm of number of directors 4.3. Empirical Model The core purpose of this study is to testify whether ESG will improve the firm stock market performance. To effectively examine the casual effects of ESG on firm stock market performance, the study implements OLS method. 𝑇𝑜𝑏𝑖𝑛𝑄𝐴𝑖,𝑡+1 = 𝛼0 + 𝛽0𝐸𝑆𝐺𝑖,𝑡 + ∑ 𝛽𝑗 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑗 1 + 𝑦𝑒𝑎𝑟𝐹𝐸 + 𝑓𝑖𝑟𝑚 𝐹𝐸 + 𝑒 (1) 5. Empirical Results 5.1. Descriptive Statistics Table 2 presents the descriptive statistics. The mean(median) value of TobinQA is 2.102(1.625), and the standard deviation is 1.481. The first quartile of the TobinQA is 1.243, and the third quartile is 2.355. The mean(median) value of TobinQB is 2.311(1.767), and the standard deviation is 1.692. The first quartile of the TobinQB is 1.330, and the third quartile is 2.609. The mean(median) value of TobinQC is 2.650 (1.985), and the standard deviation is 2.051. The first quartile of the TobinQC is 1.365, and the third quartile is 3.121. The mean(median) value of TobinQD is 2.910 (2.165), and the standard deviation is 2.316. The first quartile of the TobinQD is 1.468, and the third quartile is 3.440. The mean (median) value of ESG is 6.461 (6.000), and the standard deviation is 1.116. The first quartile of the ESG is 6.000, which is same as the median value of ESG and the third quartile is 7.000.The mean value of the size is 22.163, and the standard deviation is 1.438.The mean value of the PPE is 0.210, and the standard deviation is 0.165.The mean value of the operating cashflow is 0.044, and the standard deviation is 0.074.The mean value of the leverage is 0.439, and the standard deviation is 0.222.The mean value of the independence of the board of directors is 0.380, and the standard deviation is 0.071.The mean value of the number of board of directors is 2.288, and the standard deviation is 0.258. Table 2. Descriptive Statistics. Variable N Mean SD p25 p50 p75 Tobin QA 32425 2.102 1.481 1.243 1.625 2.355 Tobin QB 32425 2.311 1.692 1.33 1.767 2.609 Tobin QC 32425 2.65 2.051 1.365 1.985 3.121 Tobin QD 32425 2.91 2.316 1.468 2.165 3.44 ESG 32425 6.461 1.116 6 6 7 Size 32425 22.163 1.438 21.157 21.936 22.9 PPE 32425 0.21 0.165 0.08 0.175 0.303 Cfo 32425 0.044 0.074 0.005 0.044 0.087 Lev 32425 0.439 0.222 0.261 0.428 0.6 Indep 32425 0.38 0.071 0.333 0.364 0.429 Board 32425 2.288 0.258 2.197 2.303 2.485 Table 3 presents the distribution of accounting year. It described the frequency of each accounting year and transfer into a percentage. The minimum frequency is 4.81%, and the maximum frequency is 12.46%. Table 3. Year Distribution. Year Freq. Percent Cum. 2009 1,560 4.81 4.81 2010 1,861 5.74 10.55 2011 2,166 6.68 17.23 2012 2,366 7.3 24.53 2013 2,347 7.24 31.77 2014 2,373 7.32 39.08 2015 2,554 7.88 46.96 2016 2,778 8.57 55.53 2017 3,221 9.93 65.46 2018 3,502 10.8 76.26 2019 3,657 11.28 87.54 2020 4,040 12.46 100 Total 32,425 100 5.2. Main Results Table 4 presents the baseline results of firm stock market performance. Columns (1), (2), (3), (4) of Table 4 report the regression results for the TobinQA, TobinQB, TobinQC and TobinQD, respectively. As shown in column (1), the coefficient on ESG is significantly positive at the 1% level (coefficient = 0.030), suggesting that after controlling for corporate governance level characteristics and operational level characteristics, corporate sustainability increases corporate value. As shown in column (2), t value is 2.52 and coefficient is 0.022, so the coefficient on ESG is significantly positive at the 5% level, suggesting that after controlling for 248 corporate governance level characteristics and operational level characteristics, corporate sustainability increases corporate value. As shown in column (3), t value is 4.27 and coefficient is 0.040, so the coefficient on ESG is significantly positive at the 5% level, suggesting that after controlling for corporate governance level characteristics and operational level characteristics, corporate sustainability increases corporate value. As shown in column (4), t value is 2.72 and coefficient is 0.029, so the coefficient on ESG is significantly positive at the 1% level, suggesting that after controlling for corporate governance level characteristics and operational level characteristics, corporate sustainability increases corporate value. Table 4. Main Results. Tobin QA Tobin QB Tobin QC Tobin QD ESG 0.030*** 0.022** 0.040*** 0.029*** -4.13 -2.52 -4.27 -2.72 Size -0.851*** -0.847*** -1.072*** -1.056*** (-68.32) (-58.46) (-68.17) (-58.07) PPE -0.368*** -0.843*** -1.203*** -1.798*** (-5.10) (-10.03) (-13.21) (-17.07) Cfo 0.978*** 1.205*** 1.333*** 1.629*** -10.96 -11.6 -11.83 -12.51 Lev 0.857*** 0.984*** -0.004 0.03 -17.06 -16.84 (-0.06) -0.41 Indep 0.357*** 0.382*** 0.108 0.111 -3.72 -3.42 -0.89 -0.79 Board 0.018 0.028 0.088** 0.116*** -0.6 -0.79 -2.31 -2.62 Constant 20.260*** 20.448*** 26.102*** 26.095*** -72.62 -62.99 -74.1 -64.1 Firm FE YES YES YES YES Year FE YES YES YES YES N 32044 32044 32044 32044 Adj R2 0.613 0.599 0.67 0.656 Note: *, ** and *** indicate significance at the 10%, 5% and 1% levels (two-tailed), respectively. Refer to Table 1 for the variable definition and measurement. 6. Conclusion Corporate ESG improves the corporate stock market performance. 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