How Does Compliance Management Improve Corporate ESG Performance? Empirical Evidence from Annual Report Textual Information

Against the backdrop of the comprehensive advancement of the law-based governance of China and the “dual carbon” strategic goals, existing research still lacks a systematic discussion on how corporate compliance management affects ESG performance, and few studies have constructed targeted compliance management indicators from a textual perspective. To fill this research gap, this paper aims to explore the influence of corporate compliance management on ESG performance. Using Chinese A-share listed firms on the Shanghai and Shenzhen Stock Exchanges from 2010 to 2023 as research samples, this study adopts text mining techniques, combined with a panel regression model and a mediating effect model, to construct an indicator of corporate compliance management and examine its impact on ESG performance. The empirical results show that compliance management significantly improves corporate ESG performance and functions mainly through three channels: promoting corporate green innovation, fostering corporate ethical culture, and reducing agency costs. Heterogeneity tests indicate that the positive relationship is more pronounced in state-owned enterprises and in firms with higher managerial power. Further analysis reveals that compliance management also helps reduce the divergence in ESG ratings among Chinese firms, and the construction of all dimensions of compliance management can contribute to the improvement of corporate ESG performance. These findings enrich the literature on the economic consequences of compliance management and the determinants of ESG performance and provide theoretical guidance for Chinese firms to enhance ESG performance via compliance management.