Can corporate environmental, social, and governance performance influence foreign institutional investors to hold shares? Evidence from China

Abstract

With the rise of environmental, social, and governance (ESG) investment concepts, foreign institutional investors have become increasingly concerned about corporate ESG performance. Based on data of China's A‐share listed companies from 2011 to 2021, we empirically find that corporate ESG performance enhances foreign institutional investors to hold shares. Economic policy uncertainty significantly reduces the impact of corporate ESG performance on foreign institutional investors' shareholdings. The mechanism analyses show that information asymmetry and corporate reputation are the two transmission channels for corporate ESG performance that influence foreign institutional investors to hold shares. Further analysis shows that companies with good ESG performance are prone to become heavy investments and long‐term shareholdings for foreign institutional investors. The heterogeneity analyses show that the effect of ESG performance on foreign institutional investors' shareholdings is more significant among firms that are not state‐owned, with high business risk and in heavily polluting industries.