This research aims to investigate the potential effect of environmental, social and governance (ESG) performance on investment efficiency (IE). It also examines the influence of board size on the ESG–IE nexus.
The study uses a sample of Chinese A-share listed companies traded on the Shanghai Stock Exchange from 2014 to 2023. Previous studies have often used basic ordinary least squares regression, but this study has used robust regression as a main technique, followed by Driscoll–Kraay Standard Errors and feasible generalized least squares and two-stage least squares (2SLS). These techniques ensure the reliability of results by addressing heteroskedasticity, cross-sectional dependence and endogeneity concerns.
The findings of this study indicate that a high ESG score is more likely to make optimal investments and earn profit. Such firms provide holistic views about the company, which ensures transparency and increases the trust of stakeholders. More interestingly, the study reports a crucial and significant negative moderation effect of board size between ESG and IE. This implies that when ESG practices are implemented and monitored by a large board size, it tends to decrease IE.
The paper provides valuable insights for corporate managers and policymakers. It indicates that while ESG disclosures enhance IE, larger boards may reduce this benefit. Therefore, firms should optimize board size to reduce coordination difficulties, whereas regulators are suggested to mandate ESG reporting and promote board independence to ensure effective monitoring and decision-making.
The paper contributes to existing literature in three ways. Firstly, the paper aims at developing a unified framework by examining the divergent application of stakeholder and shareholder theories in emerging countries, particularly China. Secondly, it provides an in-depth understanding by examining the moderating effect of board size on the positive association of ESG and IE. Finally, the paper also offers recommendations for company managers, policymakers and investors or capital providers who strive their best to allocate their scarce resources effectively.
