A study of the impact of equity incentives on corporate ESG performance

Abstract

With the concept of sustainable development taking root in people's minds, enterprises are evolving from commercial organisations to socially responsible entities. Although equity incentives have been commonly used to promote corporate business development, there is still a theoretical gap as to whether they can enhance corporate ESG performance. Based on the 2010-2022 Shanghai and Shenzhen A-share data, this study employs a two-way fixed-effects model to reveal the dual-action mechanism of equity incentives on ESG performance, as well as the mediating effect through financing ability and innovation ability. The heterogeneity test shows that equity incentives in SOEs have a more significant effect on ESG enhancement, which stems from the fact that SOEs are more likely to direct incentive resources to sustainable development due to their policy synergies and institutional norms. Mechanism analyses show that equity incentives provide financial support for ESG investment by alleviating financing constraints, but after the improvement of financing, there is a tendency for firms to tilt their resources towards short-term profit-making projects. Meanwhile, equity incentives significantly promote corporate innovation, but the competition between innovation and ESG inputs reduces the direct ESG promotion effect of equity incentives. This study fills the theoretical gap in the relationship between equity incentives and firms' ESG performance, and provides theoretical references for the sustainable development of firms and the promotion of policy improvement.