Effect of Environmental, Social, and Governance Performance on Corporate Financialization: Evidence from China

Abstract

Many nonfinancial firms in China invest increasingly in financial assets. To understand the driving factors behind this phenomenon, this paper examines the effect of environmental, social, and governance (ESG) performance on corporate financialization. The empirical results show that ESG performance has a positive effect on corporate financialization, suggesting that ESG activities are a tool for firms to seek financial arbitrage. Further examination confirms that corporate financialization of Chinese nonfinancial listed firms is motivated mainly by maximizing short-term financial returns, rather than reserving funds for long-term development. Heterogeneity analysis shows that the positive effect is more significant in non-state-owned firms and in firms located in regions with a low degree of marketization. This study enriches the existing literature on the economic consequences of ESG performance and the influential factors of corporate financialization and provides practical guidance for government regulators to strengthen stricter regulation on ESG activities and financial asset investment to ensure sustainable and healthy economic development.