RESEARCH ARTICLE
Financial sustainability in the context of ESG disclosure: A comprehensive analysis of Chinese-listed firms
Muhammad Istiaque Hossain,
Baolei Qi,
Mohamed Marie,
Mohamed Omran,
Yucheng Chen,
Corresponding Author
Muhammad Istiaque Hossain
School of Management, Xi'an Jiaotong University, Xi'an, China
Correspondence
Muhammad Istiaque Hossain, School of Management, Xi'an Jiaotong University, 05/412 School of Management, 28 Xianning West Road, Xi'an, Shaanxi 710049, People's Republic of China.
Email: [email protected]
Search for more papers by this authorBaolei Qi
School of Management, Xi'an Jiaotong University, Xi'an, China
Search for more papers by this authorMohamed Marie
Faculty of Commerce, Cairo University, Cairo, Egypt
Search for more papers by this authorMohamed Omran
Department of Accounting, International Business School Suzhou, Xi'an Jiaotong-Liverpool University, Suzhou, Jiangsu Province, People's Republic of China
Search for more papers by this authorYucheng Chen
School of Management, Xi'an Jiaotong University, Xi'an, China
Search for more papers by this authorMuhammad Istiaque Hossain,
Baolei Qi,
Mohamed Marie,
Mohamed Omran,
Yucheng Chen,
Corresponding Author
Muhammad Istiaque Hossain
School of Management, Xi'an Jiaotong University, Xi'an, China
Correspondence
Muhammad Istiaque Hossain, School of Management, Xi'an Jiaotong University, 05/412 School of Management, 28 Xianning West Road, Xi'an, Shaanxi 710049, People's Republic of China.
Email: [email protected]
Search for more papers by this authorBaolei Qi
School of Management, Xi'an Jiaotong University, Xi'an, China
Search for more papers by this authorMohamed Marie
Faculty of Commerce, Cairo University, Cairo, Egypt
Search for more papers by this authorMohamed Omran
Department of Accounting, International Business School Suzhou, Xi'an Jiaotong-Liverpool University, Suzhou, Jiangsu Province, People's Republic of China
Search for more papers by this authorYucheng Chen
School of Management, Xi'an Jiaotong University, Xi'an, China
Search for more papers by this authorAbstract
This study examines the pivotal role of environmental, social and governance (ESG) disclosure in the financial sustainability of Chinese-listed companies, addressing a significant gap in the literature regarding the impact of corporate governance mechanisms on this relationship. Utilising a comprehensive dataset spanning from 2009 to 2021, the findings indicate that while ESG disclosure generally enhances financial sustainability, the quality of audits and the independence of boards significantly weaken this relationship by increasing transparency and mitigating managerial opportunism. The robustness of these results has been confirmed through rigorous testing. The study underscores the importance of integrating corporate governance mechanisms into firms' ESG disclosure strategies, aligning with stakeholder theory to optimise financial sustainability. This research provides theoretical and practical contributions by deepening the understanding of governance factors in ESG reporting and their strategic influence on long-term corporate financial health.
REFERENCES
- Abdullah, S. N., Ismail, K. N. I. K., & Nachum, L. (2016). Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets. Strategic Management Journal, 37(3), 466–476.
- Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31(3), 377–397.
- Alkaraan, F., Albitar, K., Hussainey, K., & Venkatesh, V. G. (2022). Corporate transformation toward industry 4.0 and financial performance: The influence of environmental, social, and governance (ESG). Technological Forecasting and Social Change, 175, 121423.
- Alsayegh, M. F., Abdul Rahman, R., & Homayoun, S. (2020). Corporate economic, environmental, and social sustainability performance transformation through ESG disclosure. Sustainability, 12(9), 3910.
- Avramov, D., Cheng, S., Lioui, A., & Tarelli, A. (2022). Sustainable investing with ESG rating uncertainty. Journal of Financial Economics, 145(2), 642–664.
- Aydoğmuş, M., Gülay, G., & Ergun, K. (2022). Impact of ESG performance on firm value and profitability. Borsa Istanbul Review, 22, S119–S127.
- Bahadori, N., Kaymak, T., & Seraj, M. (2021). Environmental, social, and governance factors in emerging markets: The impact on firm performance. Business Strategy & Development, 4(4), 411–422.
- Bello-Pintado, A., Machuca, J. A., & Danese, P. (2023). Stakeholder pressures and sustainability practices in manufacturing: Consideration of the economic development context. Business Strategy and the Environment, 32(7), 4084–4102.
- Bonaccorsi di Patti, E., D'Ignazio, A., Gallo, M., & Micucci, G. (2015). The role of leverage in firm solvency: Evidence from bank loans. Italian Economic Journal, 1, 253–286.
10.1007/s40797-015-0014-7 Google Scholar
- Chebbi, K., & Ammer, M. A. (2022). Board composition and ESG disclosure in Saudi Arabia: The moderating role of corporate governance reforms. Sustainability, 14(19), 12173.
- Chelawat, H., & Trivedi, I. V. (2016). The business value of ESG performance: The Indian context. Asian Journal of Business Ethics, 5(1), 195–210.
10.1007/s13520-016-0064-4 Google Scholar
- Chen, Z., & Xie, G. (2022). ESG disclosure and financial performance: Moderating role of ESG investors. International Review of Financial Analysis, 83, 102291.
- Clementino, E., & Perkins, R. (2021). How do companies respond to environmental, social and governance (ESG) ratings? Evidence from Italy. Journal of Business Ethics, 171(2), 379–397.
- DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183–199.
10.1016/0165-4101(81)90002-1 Google Scholar
- Defond, M. L., & Zhang, J. (2014). The timeliness of the bond market reaction to bad earnings news. Contemporary Accounting Research, 31(3), 911–936.
- Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the cost of debt: Evidence from EU countries. Critical Perspectives on Accounting, 79, 102097. https://doi.org/10.1016/j.cpa.2019.102097
- Elmghaamez, I. K., Nwachukwu, J., & Ntim, C. G. (2024). ESG disclosure and financial performance of multinational enterprises: The moderating effect of board standing committees. International Journal of Finance & Economics, 29(3), 3593–3638.
- Fatemi, A., Glaum, M., & Kaiser, S. (2018). ESG performance and firm value: The moderating role of disclosure. Global Finance Journal, 38, 45–64. https://doi.org/10.1016/j.gfj.2017.03.001
- Fiorillo, P., Gangi, F., Meles, A., Mustilli, M., & Salerno, D. (2023). The impact of equity analysts on ESG performance: Evidence from an exogenous shock. Global Business Review. https://doi.org/10.1177/09721509231168252
- Francis, J. R. (2004). What do we know about audit quality? The British Accounting Review, 36(4), 345–368.
10.1016/j.bar.2004.09.003 Google Scholar
- Franz, D. R., Crawford, D., & Johnson, E. N. (1998). The impact of litigation against an audit firm on the market value of nonlitigating clients. Journal of Accounting, Auditing & Finance, 13(2), 117–134.
10.1177/0148558X9801300202 Google Scholar
- Freeman, R. E. (2010). Stakeholder theory: The state of the art. Cambridge University Press.
10.1017/CBO9780511815768 Google Scholar
- Gangi, F., Meles, A., D'Angelo, E., & Daniele, L. M. (2019). Sustainable development and corporate governance in the financial system: Are environmentally friendly banks less risky? Corporate Social Responsibility and Environmental Management, 26(3), 529–547.
- Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), 1–22.
- Griffin, P. A., Neururer, T., & Sun, E. Y. (2020). Environmental performance and analyst information processing costs. Journal of Corporate Finance, 61, 101397.
- Hong, H., & Kacperczyk, M. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93(1), 15–36.
- Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76(2), 323–329.
- Khalil, M. A., Khalil, R., & Khalil, M. K. (2022). Environmental, social and governance (ESG)-augmented investments in innovation and firms' value: A fixed-effects panel regression of Asian economies. China Finance Review International, 14(1), 76–102.
- Kim, K. A., Kitsabunnarat-Chatjuthamard, P., & Nofsinger, J. R. (2007). Large shareholders, board independence, and minority shareholder rights: Evidence from Europe. Journal of Corporate Finance, 13(5), 859–880.
- Kim, S. J., Kim, H., & Atukeren, E. (2023). Effects of board independence on greenhouse gas emissions and financial consequences: Evidence from South Korea. Environments, 10(3), 56.
- Kotsantonis, S., & Serafeim, G. (2019). Four things no one will tell you about ESG data. Journal of Applied Corporate Finance, 31(2), 50–58.
- Lee, C. C. (2023). Analyses of the operating performance of information service companies based on indicators of financial statements. Asia Pacific Management Review, 28, 410–419.
- Li, Y., Gong, M., Zhang, X. Y., & Koh, L. (2018). The impact of environmental, social, and governance disclosure on firm value: The role of CEO power. British Accounting Review, 50(1), 60–75.
- Li, Y., Zhang, Y., & Solangi, Y. A. (2023). Assessing ESG factors and policies of green finance investment decisions for sustainable development in China using the fuzzy AHP and fuzzy DEMATEL. Sustainability, 15(21), 15214.
- Liu, H., & Zhang, Z. (2023). The impact of managerial myopia on environmental, social and governance (ESG) engagement: Evidence from Chinese firms. Energy Economics, 122, 106705.
- Liu, N., Liu, C., Xia, Y., Ren, Y., & Liang, J. (2020). Examining the coordination between green finance and green economy aiming for sustainable development: A case study of China. Sustainability, 12(9), 3717.
- Macaire, C., & Naef, A. (2023). Greening monetary policy: Evidence from the People's Bank of China. Climate Policy, 23(1), 138–149.
- Mallin, C. A., & Michelon, G. (2011). Board reputation attributes and corporate social performance: An empirical investigation of the US best corporate citizens. Accounting and Business Research, 41(2), 119–144.
- Marie, M., Qi, B., Elgammal, M., & Elnahass, M. (2024). A more sustainable future: Can politically connected CEOs spur the nexus between ESG performance and firm financial performance? Journal of International Financial Markets, Institutions and Money, 96, 102056.
10.1016/j.intfin.2024.102056 Google Scholar
- Minutolo, M. C., Kristjanpoller, W. D., & Stakeley, J. (2019). Exploring environmental, social, and governance disclosure effects on the S&P 500 financial performance. Business Strategy and the Environment, 28(6), 1083–1095. https://doi.org/10.1002/bse.2303
- Moschella, J., Boulianne, E., & Magnan, M. (2023). Risk management in small-and medium-sized businesses and how accountants contribute. Contemporary Accounting Research, 40(1), 668–703.
- Muñoz-Torres, M. J., Fernández-Izquierdo, M. Á., Rivera-Lirio, J. M., & Escrig-Olmedo, E. (2019). Can environmental, social, and governance rating agencies favor business models that promote a more sustainable development? Corporate Social Responsibility and Environmental Management, 26(2), 439–452.
- Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.
- Nirino, N., Santoro, G., Miglietta, N., & Quaglia, R. (2021). Corporate controversies and company's financial performance: Exploring the moderating role of ESG practices. Technological Forecasting and Social Change, 162, 120341.
- Park, J., Lee, J., & Shin, J. (2023). Corporate governance, compensation mechanisms, and voluntary disclosure of carbon emissions: Evidence from Korea. Journal of Contemporary Accounting & Economics, 19(3), 100361.
- Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2021). Responsible investing: The ESGefficient frontier. Journal of Financial Economics, 142(2), 572–597.
- Pham, H. S. T., & Nguyen, D. T. (2019). The effects of corporate governance mechanisms on the financial leverage–profitability relation: Evidence from Vietnam. Management Research Review, 43(4), 387–409.
10.1108/MRR-03-2019-0136 Google Scholar
- Plattek, D. N., & Figueiredo, O. H. (2023). Sustainable and governance investment funds in Brazil: A performance evaluation. Sustainability, 15(11), 8517.
- Ryan, H. E., Jr., & Wiggins, R. A., III. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73(3), 497–524.
- Salehi, M., Ammar Ajel, R., & Zimon, G. (2023). The relationship between corporate governance and financial reporting transparency. Journal of Financial Reporting and Accounting, 21(5), 1049–1072.
- Serafeim, G., & Yoon, A. (2023). Stock price reactions to ESG news: The role of ESG ratings and disagreement. Review of Accounting Studies, 28(3), 1500–1530.
- Shahzad, F., Lu, J., & Fareed, Z. (2019). Does firm life cycle impact corporate risk taking and performance? Journal of Multinational Financial Management, 51, 23–44.
- Skinner, D. J., & Srinivasan, S. (2012). Audit quality and auditor reputation: Evidence from Japan. The Accounting Review, 87(5), 1737–1765.
- Tan, Y., & Zhu, Z. (2022). The effect of ESG rating events on corporate green innovation in China: The mediating role of financial constraints and managers' environmental awareness. Technology in Society, 68, 101906.
- Wang, N., Pan, H., Feng, Y., & Du, S. (2023). How do ESG practices create value for businesses? Research review and prospects. Sustainability Accounting, Management and Policy Journal 15(5), 1155–1177.
10.1108/SAMPJ-12-2021-0515 Google Scholar
- Weber, J., Willenborg, M., & Zhang, J. (2008). Does auditor reputation matter? The case of KPMG Germany and ComROAD AG. Journal of Accounting Research, 46(4), 941–972.
- Xu, J., Wei, J., & Lu, L. (2019). Strategic stakeholder management, environmental corporate social responsibility engagement, and financial performance of stigmatised firms derived from Chinese special environmental policy. Business Strategy and the Environment, 28(6), 1027–1044.
- Yu, E. P., Luu, B. V., & Chen, C. H. (2020). Greenwashing in environmental, social and governance disclosures. Research in International Business and Finance, 52, 101192. https://doi.org/10.1016/j.ribaf.2020.101192
- Zabolotnyy, S., & Wasilewski, M. (2019). The concept of financial sustainability measurement: A case of food companies from northern Europe. Sustainability, 11(18), 5139.
- Zahid, R. A., Saleem, A., Maqsood, U. S., & Sági, J. (2024). Moderating role of audit quality in ESG performance and capital financing dynamics: Insights in China. Environment, Development and Sustainability, 26(5), 12031–12060.
- Zahid, R. A., Taran, A., Khan, M. K., & Chersan, I. C. (2023). ESG, dividend payout policy and the moderating role of audit quality: Empirical evidence from Western Europe. Borsa Istanbul Review, 23(2), 350–367.
- Zeidan, R. (2022). Obstacles to sustainable finance and the COVID-19 crisis. Journal of Sustainable Finance & Investment, 12(2), 525–528.
10.1080/20430795.2020.1783152 Google Scholar
- Zhang, D., & Liu, L. (2022). Does ESG performance enhance financial flexibility? Evidence from China. Sustainability, 14(18), 11324.
10.3390/su141811324 Google Scholar
- Zhao, C., Guo, Y., Yuan, J., Wu, M., Li, D., Zhou, Y., & Kang, J. (2018). ESG and corporate financial performance: Empirical evidence from China's listed power generation companies. Sustainability, 10(8), 2607.
