How Does Firm ESG Performance Impact Financial Constraints? An Experimental Exploration of the COVID-19 Pandemic

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This research assesses the effects of COVID-19-associated shocks on financial constraints and sustainable development goal (SDG) performance to shed light on the impact of SDGs on economic recovery. We construct a large sample of Chinese listed firms from quarterly firm-level accounting data from the China Stock Market & Accounting Research Database for the period 2019Q1–2021Q1, matched with environmental, social, and governance (ESG) scores, SDG performance from the WIND Database, and complemented with data on cumulative and new cases of COVID-19 from the World Health Organization. We use difference-in-differences to investigate any causal effect from COVID-19. We find that COVID-19 induces financial constraints in firms. Further, differing from the existing literature on the determinants of SDGs, we explore the supportive role of SDG performance on firm financial performance and show that ESG can better describe SDG performance and alleviate financial constraints. Moreover, both internal and external financial intermediaries improve with enhanced ESG performance in overcoming financial constraints. Our findings strongly indicate that a sustainable development strategy facilitates efficient adaptation to financial challenges and assists in overcoming external shocks.


It is widely discussed that the COVID-19 pandemic has caused an enormous spike in uncertainty and wide-ranging effects on transportation, population mobility, health care, and economies (Baker et al. 2020; Zhang and Hu 2021). As a result, sustainable economic growth has been severely disrupted (Milea 2020; Vidya and Prabheesh 2020; Yoshino and Otsuka 2021). The impact of the COVID-19 pandemic on financial markets has gained much attention (Ali et al. 2020). A rapidly growing body of literature on COVID-19 focuses on the impact of the pandemic on financial markets, including risk (Rizwan et al. 2020), stock market volatility (Baek et al. 2020; Phan and Narayan 2020), firm returns (Shen et al. 2020), and liquidity (Just and Echaust 2020). In contrast, particularly owing to data limitations, exploration of the impact of the COVID-19 pandemic at the firm level is quite limited. Thus, there is a great need to investigate how the pandemic influences corporate financial performance, given the severe global public health crisis.

Given that China is the world’s largest developing economy and supplier of intermediate goods, the uncertainty caused by the COVID-19 pandemic has significantly affected a large number of economies worldwide (Milea 2020; Vidya and Prabheesh 2020). Existing studies show the outcomes from the COVID-19 pandemic in China, including the financial reaction (Xiong et al. 2020; Li et al. 2021) and damage to firm performance (Shen et al. 2020). However, the financial effects of the pandemic are less explored. In particular, the mechanisms and strategies to overcome firm financial constraints need further investigation. This paper sheds light on the supportive mechanisms and the strategies pursued by firms, including sustainable development goals (SDGs), and it provides evidence on the impact of SDG performance on firm financial performance.

The existing literature on the contribution of SDGs to firm performance is limited. The objectives of SDGs are to establish sustainable, innovative strategies, and programs to help in poverty alleviation, employment opportunities, and community support while reducing environmental pollution (Chams and Garcia-Blandon 2019; Taghizadeh-Hesary et al. 2021). SDGs have become a collective goal and value of business organizations, government, social organizations, and policymakers (Branco and Rodrigues 2006; Zeug et al. 2019). Further, SDGs have become a top priority of business organizations (Ding et al. 2019). Effective strategies are needed by organizations to attain SDGs (Grainger‐Brown and Malekpour 2019). Strong SDG performance sends positive signals to the product and financial markets, helping firms gain market share and financial support. Thus, this paper assesses the supportive impact arising from firm pursuit of SDGs given the shocks associated with the COVID-19 pandemic with respect to financial constraints and financial intermediary performance.

We use financial data disclosed by Chinese listed companies from the China Stock Market & Accounting Research Database (CSMAR) for the period 2019Q1 to 2021Q1 and environmental, social, and governance (ESG) data representing an enterprise’s SDG performance from the WIND Database. In addition, according to the spatial distribution of COVID-19, we distinguish whether enterprises are located in regions with serious epidemics to identify our estimation model. We test whether COVID-19 hurts firm financial performance and quantify the magnitude of the effect. We use difference-in-differences (DID) to investigate the causal effect on financial constraints caused by COVID-19. Further, differing from the existing literature on the determinants of SDGs, we explore the supportive role of SDG performance on firm financial performance. We make several contributions to the literature. First, we provide new evidence on firm-level financial performance caused by the COVID-19 pandemic, and we show that financial constraints are driven by the outbreak. Moreover, we uncover firm financial outcomes using a series of financial constraint indicators and contribute to the growing, but limited understanding of the economic outcomes from the pandemic (Xiong et al. 2020; Hu and Zhang 2021). Second, this paper explores how SDG performance impacts firm performance. More particularly, it provides the new insight that SDGs can improve information asymmetry, thus helping address firm financial constraints (Ding et al. 2019; Zeug et al. 2019). Third, we show that ESG is an effective indicator that well describes SDGs, and we describe the ESG moderating mechanisms on financial constraints, providing new evidence for the recent ESG literature (Friede et al. 2015; Fatemi et al. 2018; Wong et al. 2021).

This paper proceeds as follows. “Literature Review and Hypothesis Development” section presents our research hypotheses in accordance with the literature review and discussion. “Data and Summary Statistics” section presents our data sources and variable definitions. “Econometric Specifications” section outlines our econometric strategy. “Empirical Results” section describes our empirical findings, and “Robustness test” section provides a series of robustness tests. Finally, “Conclusions” section concludes with a review our main insights.

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