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ESG performance and innovation in listed manufacturing companies–A prospect theory perspective

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  • Lei, Xiao
  • Tu, Qin

Abstract

This paper uses panel data from Chinese manufacturing firms (2009-2023) to explore the piecewise linear relationship between ESG performance and innovation through prospect theory. The findings indicate that ESG improvements enhance innovation capabilities, with firms exhibiting behaviors like reference dependence, loss aversion, and diminishing marginal utility. These effects are more pronounced in heavily polluting industries and companies experiencing the COVID-19 pandemic. Further analysis reveals that firm-level dynamic reference points also play a role, and external attention is a crucial motivator for shifts in corporate behavior. This study provides a more comprehensive and nuanced understanding of ESG's impact on corporate innovation.

Suggested Citation

  • Lei, Xiao & Tu, Qin, 2025. "ESG performance and innovation in listed manufacturing companies–A prospect theory perspective," Finance Research Letters, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324016325
    DOI: 10.1016/j.frl.2024.106603
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