ESG Score Boosts Stock Excess Returns: From the Perspective of Information

Abstract

This study examines whether environmental, social, and governance (ESG) performance improves risk-adjusted stock returns and identifies the information-transmission channels underlying this relationship. Using an unbalanced panel of 1,104 Chinese A-share listed firms from 2011 to 2019 and Bloomberg ESG scores, the analysis employs a two-way fixed-effects model with firm-level clustered standard errors. The baseline results show that higher ESG scores are significantly associated with higher stock excess returns, measured by the Sharpe ratio. Mechanism tests further indicate that ESG performance affects stock returns by alleviating information asymmetry, concentrating investors' limited attention, and strengthening investor confidence. The information-asymmetry channel exhibits a masking effect, whereas analyst coverage and investor confidence operate as partial mediators. The baseline findings remain robust after using lagged ESG scores, applying a city-peer ESG instrumental variable in a two-stage least-squares framework, replacing the dependent and explanatory variables, adding additional controls, and winsorizing continuous variables. Heterogeneity tests show that the positive ESG effect is stronger for non-state-owned firms, heavily polluting firms, and firms located in more market-oriented regions. Further analysis indicates that the environmental and governance dimensions are the principal drivers of the aggregate ESG effect and that institutional ownership partially mediates the ESG-return relationship. Overall, the findings show that ESG performance is relevant not only to corporate fundamentals but also to the transmission and incorporation of firm-specific information into stock prices, with implications for listed firms, investors, financial institutions, and regulators.