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Corporate underinvestment and its effects on environmental, social, and governance performance

Author

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  • Mingyao Cao

    (Universiti Sains Malaysia
    National University of Singapore)

  • Keyi Duan

    (Universiti Sains Malaysia
    University of North Carolina at Chapel Hill)

  • Haslindar Ibrahim

    (Universiti Sains Malaysia)

Abstract

This research examines the impact of corporate underinvestment on environmental, social, and governance (ESG) performance, using data from A-listed companies in China spanning the period 2011–2020. By disaggregating ESG into its three components, namely environmental, social, and governance factors, this study aims to determine the specific influence of underinvestment on each aspect. Employing ordinary least squares and two-stage least squares methods, the empirical results reveal a negative correlation between underinvestment and ESG ratings, particularly in the environmental and social dimensions. Further analysis shows that the effects vary among state-owned enterprises (SOE) and non-state-owned enterprises (NSOE), as well as companies facing different financing constraints. Notably, SOE and entities with significant financing limitations experience a more pronounced decline in ESG evaluations due to underinvestment tendencies. The findings of this research provide valuable insights for ESG-related policy and strategic adjustments, enhancing our understanding of the consequences of underinvestment on ESG metrics. It also provides a micro-level analysis of the dynamics within Chinese corporations and sheds light on the divergent effects based on different enterprise characteristics.

Suggested Citation

  • Mingyao Cao & Keyi Duan & Haslindar Ibrahim, 2025. "Corporate underinvestment and its effects on environmental, social, and governance performance," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 27(6), pages 13755-13775, June.
    • Handle: RePEc:spr:endesu:v:27:y:2025:i:6:d:10.1007_s10668-023-04443-y
    DOI: 10.1007/s10668-023-04443-y
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    References listed on IDEAS

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