Corporate underinvestment and its effects on environmental, social, and governance performance

This research examines the impact of corporate underinvestment on environmental, social, and governance (ESG) performance, using data from A-listed companies in China spanning the period 2011-2020. By disaggregating ESG into its three components, namely environmental, social, and governance factors, this study aims to determine the specific influence of underinvestment on each aspect. Employing ordinary least squares and two-stage least squares methods, the empirical results reveal a negative correlation between underinvestment and ESG ratings, particularly in the environmental and social dimensions. Further analysis shows that the effects vary among state-owned enterprises (SOE) and non-state-owned enterprises (NSOE), as well as companies facing different financing constraints. Notably, SOE and entities with significant financing limitations experience a more pronounced decline in ESG evaluations due to underinvestment tendencies. The findings of this research provide valuable insights for ESG-related policy and strategic adjustments, enhancing our understanding of the consequences of underinvestment on ESG metrics. It also provides a micro-level analysis of the dynamics within Chinese corporations and sheds light on the divergent effects based on different enterprise characteristics.