ESG, State Ownership, and Stock Returns: Evidence from China

This study shows that state ownership affects the impact of environmental, social, and governance (ESG) activities on firm value, using data covering ESG performance of the entire cross-section of China’s stock markets. Taking the COVID-19 market crash as an exogenous shock, we find a positive relationship between ESG and stock returns for non-state-owned enterprises (non-SOEs). The effect does not exist for state-owned enterprises (SOEs). The ESG effects in non-SOEs concentrate on employee relations and information transparency, and depend on institutional investor ownership. Furthermore, we find that ESG predicts positive long-run stock returns and operating performance for non-SOEs, but not for SOEs. The results suggest that state ownership reduces the value of ESG activities.