ISSN: 2225-8329
Open access
As ESG has become increasingly prominent and gradually incorporated into capital market pricing, whether ESG performance is reflected in stock returns has emerged as a central research question. Using a sample of 4,452 Chinese A-share listed firms from the Shanghai and Shenzhen stock exchanges over the period 2014–2024, this study employs a two-way fixed effects model to examine the effects of overall ESG performance and its environmental, social, and governance pillars on stock returns, while further exploring the mediating role of financial distress. The findings show that overall ESG performance is significantly positively associated with stock returns, suggesting that the capital market assigns a premium to firms with superior ESG practices. Further analysis reveals that the environmental and social pillars do not exhibit significant positive market effects, whereas the governance pillar exerts a significant positive effect on stock returns. Mediation analysis indicates that financial distress serves as a significant mediator in the relationship between ESG performance and stock returns, with the mediating effect mainly driven by the governance pillar. The results remain robust to a series of robustness checks and endogeneity tests. This study enriches the literature on the capital market consequences of ESG performance by focusing on stock returns and provides new empirical evidence on the heterogeneous effects of ESG pillars and their underlying mechanisms in emerging markets.
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Amore, M. D., & Bennedsen, M. (2016). Corporate governance and green innovation. Journal of Environmental Economics and Management, 75, 54–72. https://doi.org/10.1016/j.jeem.2015.11.003
Bai, X., Han, J., Ma, Y., & Zhang, W. (2022). ESG performance, institutional investors’ preference and financing constraints: Empirical evidence from China. Borsa Istanbul Review, 22, S157–S168. https://doi.org/10.1016/j.bir.2022.11.013
Bamel, N., Khatri, K., Bamel, U., & Kumar, S. (2025). ESG disclosure and firm performance in global south economy: Does industry profile and board independence moderate the relationship. International Review of Economics & Finance, 100, 104093. https://doi.org/10.1016/j.iref.2025.104093
Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. https://doi.org/10.1037/0022-3514.51.6.1173
Bilyay-Erdogan, S., Danisman, G. O., & Demir, E. (2024). ESG performance and investment efficiency: The impact of information asymmetry. Journal of International Financial Markets, Institutions and Money, 91, 101919. https://doi.org/10.1016/j.intfin.2023.101919
Cardoso, G., Carr, D. D., & Rogers, P. (2019). Does corporate governance matter for stock returns volatility in the Brazilian context? Corporate Governance, 19(6), 1236–1252. https://doi.org/10.1108/CG-03-2019-0083
Chen, J. Z., Li, Z., Mao, T., & Yoon, A. (2025). Global versus local ESG ratings: Evidence from China. The Accounting Review, 100(4), 161–192. https://doi.org/10.2308/TAR-2022-0703
Chen, R. C. Y., Hung, S.-W., & Lee, C.-H. (2017). Does corporate value affect the relationship between corporate social responsibility and stock returns? Journal of Sustainable Finance & Investment, 7(2), 188–196. https://doi.org/10.1080/20430795.2016.1272947
Cui, J., Jo, H., & Na, H. (2018). Does corporate social responsibility affect information asymmetry? Journal of Business Ethics, 148(3), 549–572. https://doi.org/10.1007/s10551-015-3003-8
de Haan, M., Dam, L., & Scholtens, B. (2012). The drivers of the relationship between corporate environmental performance and stock market returns. Journal of Sustainable Finance & Investment, 2(3–4), 338–375. https://doi.org/10.1080/20430795.2012.738601
Dichev, I. D. (1998). Is the risk of bankruptcy a systematic risk? The Journal of Finance, 53(3), 1131–1147. https://doi.org/10.1111/0022-1082.00046
Doku, J. N., Abdul-Razak Borowa, H., Mohammed, I., & Attah-Botchwey, E. (2023). Impact of corporate board size and board independence on stock returns volatility in Ghana. Cogent Business & Management, 10(2), 2204597. https://doi.org/10.1080/23311975.2023.2204597
Dorfleitner, G., Utz, S., & Wimmer, M. (2018). Patience pays off – corporate social responsibility and long-term stock returns. Journal of Sustainable Finance & Investment, 8(2), 132–157. https://doi.org/10.1080/20430795.2017.1403272
Engelhardt, N., Ekkenga, J., & Posch, P. (2021). ESG ratings and stock performance during the COVID-19 crisis. Sustainability, 13(13), 7133. https://doi.org/10.3390/su13137133
Escobar-Saldívar, L. J., Villarreal-Samaniego, D., & Santillán-Salgado, R. J. (2025). The effects of ESG scores and ESG momentum on stock returns and volatility: Evidence from U.S. markets. Journal of Risk and Financial Management, 18(7), 367. https://doi.org/10.3390/jrfm18070367
Fan, R., Xiong, X., Li, Y., & Gao, Y. (2023). Do green bonds affect stock returns and corporate environmental performance? Evidence from China. Economics Letters, 232, 111322. https://doi.org/10.1016/j.econlet.2023.111322
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
Feng, G.-F., Long, H., Wang, H.-J., & Chang, C.-P. (2022). Environmental, social and governance, corporate social responsibility, and stock returns: What are the short- and long-run relationships? Corporate Social Responsibility and Environmental Management, 29(5), 1884–1895. https://doi.org/10.1002/csr.2334
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman.
Gao, B., Liu, H., Tong, S., & Jin, Y. (2025). Does ESG performance reduce bankruptcy risk? International Journal of Financial Studies, 13(4), 221. https://doi.org/10.3390/ijfs13040221
Gao, P., Parsons, C. A., & Shen, J. (2018). Global relation between financial distress and equity returns. The Review of Financial Studies, 31(1), 239–277. https://doi.org/10.1093/rfs/hhx060
Habib, A. M. (2023). Do business strategies and environmental, social, and governance (ESG) performance mitigate the likelihood of financial distress? A multiple mediation model. Heliyon, 9(7), e17847. https://doi.org/10.1016/j.heliyon.2023.e17847
Horváthová, E. (2010). Does environmental performance affect financial performance? A meta-analysis. Ecological Economics, 70(1), 52–59. https://doi.org/10.1016/j.ecolecon.2010.04.004
Hua, X., Li, H., & Wang, Y. (2026). Do Chinese firms’ ESG activities mitigate stock price crash risk? European Financial Management, 32(2), 455–471. https://doi.org/10.1111/eufm.70018
Hunjra, A. I., Mehmood, R., & Tayachi, T. (2020). How do corporate social responsibility and corporate governance affect stock price crash risk? Journal of Risk and Financial Management, 13(2), 30. https://doi.org/10.3390/jrfm13020030
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking & Finance, 43, 1–13. https://doi.org/10.1016/j.jbankfin.2014.02.013
Limkriangkrai, M., Koh, S., & Durand, R. B. (2017). Environmental, social, and governance (ESG) profiles, stock returns, and financial policy: Australian evidence. International Review of Finance, 17(3), 461–471. https://doi.org/10.1111/irfi.12101
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), 1785–1824. https://doi.org/10.1111/jofi.12505
Luo, D. (2022). ESG, liquidity, and stock returns. Journal of International Financial Markets, Institutions and Money, 78, 101526. https://doi.org/10.1016/j.intfin.2022.101526
Luo, J., Bi, M., & Jia, D. (2022). Corporate social responsibility risk and firm performance: A network perspective. International Journal of Financial Studies, 10(2), 40. https://doi.org/10.3390/ijfs10020040
Ma, D., Zhai, P., Zhang, D., & Ji, Q. (2024). Excess stock returns and corporate environmental performance in China. Financial Innovation, 10(1), 41. https://doi.org/10.1186/s40854-023-00569-0
Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2021). Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 142(2), 572–597. https://doi.org/10.1016/j.jfineco.2020.11.001
Rostami, S., Rostami, Z., & Kohansal, S. (2016). The effect of corporate governance components on return on assets and stock return of companies listed in Tehran Stock Exchange. Procedia Economics and Finance, 36, 137–146. https://doi.org/10.1016/S2212-5671(16)30025-9
Shanaev, S., & Ghimire, B. (2022). When ESG meets AAA: The effect of ESG rating changes on stock returns. Finance Research Letters, 46, 102302. https://doi.org/10.1016/j.frl.2021.102302
Tsai, H.-J., & Wu, Y. (2022). Changes in corporate social responsibility and stock performance. Journal of Business Ethics, 178(3), 735–755. https://doi.org/10.1007/s10551-021-04772-w
Vasenin, M., Shanaev, S., Panta, H., & Ghimire, B. (2026). ESG ratings in motion: The global market response to upgrades and downgrades. Journal of Sustainable Finance & Investment, 1–23. https://doi.org/10.1080/20430795.2025.2612581
Verheyden, T., Eccles, R. G., & Feiner, A. (2016). ESG for all? The impact of ESG screening on return, risk, and diversification. Journal of Applied Corporate Finance, 28(2), 47–55. https://doi.org/10.1111/jacf.12174
Wang, H., Jiao, S., Ge, C., & Sun, G. (2024). Corporate ESG rating divergence and excess stock returns. Energy Economics, 129, 107276. https://doi.org/10.1016/j.eneco.2023.107276
Wang, H., Jiao, S., & Ma, C. (2024). The impact of ESG responsibility performance on corporate resilience. International Review of Economics & Finance, 93, 1115–1129. https://doi.org/10.1016/j.iref.2024.05.033
Wang, J., Wang, S., Dong, M., & Wang, H. (2024). ESG rating disagreement and stock returns: Evidence from China. International Review of Financial Analysis, 91, 103043. https://doi.org/10.1016/j.irfa.2023.103043
Wong, W. C., Batten, J. A., Ahmad, A. H., Mohamed-Arshad, S. B., Nordin, S., & Adzis, A. A. (2021). Does ESG certification add firm value? Finance Research Letters, 39, 101593. https://doi.org/10.1016/j.frl.2020.101593
Xue, Y., Zhang, C., Mentel, G., Mohammed, K. S., Rosak-Szyrocka, J., & Zhao, X. (2025). Impact of ESG rating divergence on corporate resilience: Insights from China’s A-share market. Environment, Development and Sustainability. https://doi.org/10.1007/s10668-025-06799-9
Yadav, M., Dhingra, B., Batra, S., Saini, M., & Aggarwal, V. (2024). ESG scores and stock returns during COVID-19: An empirical analysis of an emerging market. International Journal of Social Economics, 52(3), 390–405. https://doi.org/10.1108/IJSE-10-2023-0819
Yin, X.-N., Li, J.-P., & Su, C.-W. (2023). How does ESG performance affect stock returns? Empirical evidence from listed companies in China. Heliyon, 9(5), e16320. https://doi.org/10.1016/j.heliyon.2023.e16320
Zhao, L., Naktnasukanjn, N., Dawod, A. Y., & Zhang, B. (2024). Impacts of investor attention and accounting information comparability on stock returns: Empirical evidence from Chinese listed companies. International Journal of Financial Studies, 12(1), 18. https://doi.org/10.3390/ijfs12010018
Zhou, Z., Zhou, X., Zhang, X., & Chen, W. (2025). Judicial Waves, Ethical Shifts: Bankruptcy Courts and Corporate ESG Performance. Journal of Business Ethics, 198(3), 537–557. https://doi.org/10.1007/s10551-024-05780-2
Mou, J., Lau, W.-T., & Chin, L. (2026). ESG Performance and Stock Returns in China: Uncovering the Financial Distress Channel. International Journal of Academic Research in Accounting, Finance and Management Sciences, 16(2), 1–20.
Copyright: © 2026 The Author(s)
Published by HRMARS (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode