Although the impact of environmental, social and governance (ESG) on firms' innovation has attracted attention, the existing research findings diverge. The authors believe that failure to consider both innovation input and output is an important reason for the divergence of conclusions in the extant literature when discussing the impact of ESG and firm innovation. Thus, based on signaling theory, this study aims to reconcile these divergent findings by examining the impact of ESG performance on firms' innovation efficiency.
To seek empirical evidence to support the authors’ theoretical view, the authors conduct an empirical test based on the Tobit model using 8 years of data from Chinese listed companies.
Although ESG performance effectively improves firms' innovation efficiency, the institutional-level signaling environment (including state-owned firms and regional market development) weakens the positive effect of ESG performance on firms' innovation efficiency. Further tests suggest that financing constraints partially mediate the relationship between ESG performance and firms' innovation efficiency.
By systematically revealing whether, how and under what circumstances ESG performance improves firms' innovation advantages, this study bridges the gap in the existing literature and highlights important implications to suggest how firms can better capture the value associated with ESG.
