How does ESG dimensional imbalance affect firm innovation?

This study examines the influence of Environmental, Social, and Governance (ESG) dimensional imbalance on firm innovation. While prior research highlights a positive association between ESG investment and innovation, limited attention has been paid to how allocating ESG investments unevenly across different stakeholder dimensions affects innovation outcomes. We introduce the concept of ESG dimensional imbalance, defined as a firm's strategic concentration of ESG investments toward certain stakeholder groups while neglecting others. Drawing on strategic and signaling perspectives, we argue that ESG dimensional imbalance restricts access to external resources and generates stakeholder perceptions of hypocrite and opportunism, thereby undermining firm innovation. Using a panel dataset of 4380 China-listed A-share firms from 2007 to 2021 (35,133 firm-year observations), we find that ESG dimensional imbalance significantly hinders firm innovation. Moreover, we show that internal slack resources, favorable media evaluations, and venture capital (VC) shareholding can mitigate these negative effects by offering alternative resources and sending compensatory signals to stakeholders. This study contributes to the ESG and innovation literature by (1) emphasizing the strategic significance of ESG investment configurations, (2) uncovering dual mechanisms through which ESG dimensional imbalance impairs innovation, and (3) identifying contextual moderators that buffer its adverse impacts.