The impact mechanism of ESG ratings on firm value: An empirical study based on the multi-period difference-in-differences approach

Abstract

The high-quality development of enterprises is fundamental to driving sustained economic growth. Our study takes A-share listed companies in China from 2011 to 2020 as the research sample, with a systematic examination of the impact of changes in ESG (Environmental, Social and Gov-ernance) ratings on firms' total factor productivity (TFP). The exogenous shock of ESG rating disclosure by SynTao Green Finance is employed, combined with a multi-period difference-in-differences model being utilised for this purpose. The results show that: (1) ESG ratings significantly increase both the book value and market value of companies. (2) ESG ratings realise value effects through different channels: the ESG rating event significantly reduces corporate financing costs, easing financial burdens and thus promoting the increase of corporate value; on the other hand, the ESG rating event significantly mitigates agency problems, enhances information symmetry between management, shareholders and other stakeholders, increases corporate operational transparency, and strengthens corporate monitoring and control mechanisms, increasing market value. (3) Heterogeneity analysis shows that the value-enhancing effects of ESG ratings are more pronounced for companies that face greater market competition and receive more market attention. The results of our study may have a more significant impact in the future on the role of policymakers in strengthening ESG disclosure and rating systems to promote firm value.