The Moderating Role of Ownership Concentration on Financing Decisions and Firm’s Sustainability: Evidence from China

Abstract

We examined the impact of financing decisions on a firm’s sustainability in China as it aspires to achieve carbon neutrality. To proxy firms’ sustainability performance, we proposed an index for environmental, social, and governance (ESG) performance. The financing decision was proxied by debt funding and equity funding. Using secondary data from China Stock Market Accounting Data from 2016 to 2022, we utilize the fixed effect and fully modified ordinary least squares estimators for the empirical analysis. The analysis indicated a favorable link between debt funding and ESG performance. We uncovered an inconsistent association between equity funding and ESG performance. Moreover, ownership concentration revealed a significant role in moderating the impact of debt financing and ESG performance in China. The findings affirm that firms should rely on debt funding rather than equity funding to enhance their ESG performance. Hence, policymakers should enact laws allowing easy access to debt funding for companies to ensure higher ESG performance. This, in the long term, will contribute to the Chinese dream of carbon neutrality.

Addressing environment, social and governance (ESG) investment in China: Does board composition and financing decision matter?

“…The study's findings are similar to Ref. [ 54 ], who found a positive link between financing decisions and ESG performance.…”

“…When analyzing data panels, it is essential to account for cross-sectional dependence, which occurs when variables within the same cross-section are linked because of shared, unobserved causes. This is recognized as a ubiquitous cross-sectional dependency, and it can affect analysis reliability by introducing biases [ 54 ]. The level and amount of cross-sectional dependency can be assessed by considering the degree and type of cross-sectional linkages within the variables.…”

“…According to the stakeholder theory perspective, companies should consider stakeholders' interests when financing investment objectives to ensure the investment is ethical [ 53 ]. Companies that rely on equity funding are in a better position to balance the needs of their stakeholders since they are less financially leveraged and less obligated to debt [ 54 ]. In contrast to the stakeholder theory perspective, debt holders put a premium on financial gains and risk reduction, which could restrict a company's capacity to serve the interests of different stakeholders.…”

Assessing the Role of Sustainability Disclosure on Firms’ Financial Performance: Evidence from the Energy Sector of Belt and Road Initiative Countries

“…Full disclosure means providing detailed information about the theme element, partial disclosure means providing a reasonable number of relevant details, and non-disclosure means not providing any information that is relevant to the theme element. To attain a strong and clear scale, we modified the scoring by [51], using the score values 3, 2, and 0 instead of 3, 2, 1 or 2, 1, 0. With 3 signifying thorough disclosure, 2 representing partial disclosure, and 0 for no disclosure.…”

Corporate governance and reporting quality of accounts in China-listed firms. A moderating role of ownership pattern

“…Recent research may dive into how concentrated ownership arrangements might either assist or hinder managerial control and monitoring. A dominant shareholder may be able to exercise significant influence on board composition, executive compensation, and strategic decisions due to high ownership concentration, potentially modifying corporate governance practices [43]. However, the degree of shareholder activism inside a corporation is influenced by ownership concentration [44].…”