The Effect of ESG on Stock Mispricing: Empirical Evidence From China's A-Share Listed Companies

In this paper, the effect of ESG performance on stock mispricing is explored across all A-share listed companies from 2010 to 2022. The research scope consists of all A-share listed companies from 2010 to 2022, and both the effect of ESG performance and the underlying mechanisms are explored. The findings of this study indicate a negative relationship between ESG performance and stock mispricing which suggests that improved ESG performance is effective in decreasing stock price discrepancies. In addition, corporate heterogeneity was considered in additional analysis and indicates that the reducing influence of ESG performance on stock mispricing becomes more evident in specific types of companies consisting of those with weaker internal controls, non–state-owned status, operation outside of polluting industries, and those experiencing considerable financing limitations. Mechanism tests suggest that ESG performance contributes to the reduction of stock mispricing through the enhancement of digital transformation and greater transparency. Finally, the study considered conditions of low credibility in corporate information disclosure and market instability. Under these specific conditions, ESG performance demonstrates a significant negative effect on stock mispricing for companies with a smaller proportion of institutional investors. Through the insights gained from this research, companies can effectively work to lower stock mispricing. Enhancing corporate value can be achieved by companies through rigorous ESG standard disclosure and increased transparency. These actions, accordingly, promote market transparency and stability. Finally, these improvements contribute to the advancement of overall environmental and social governance. This study holds practical implications for both corporations and the financial market.