Can words drive action? ESG disclosure mandate and cross-listed firms' ESG performance: evidence from China

The research problem This study examines whether the environmental, social, and governance (ESG) disclosure mandate enacted in Hong Kong in 2016 has affected the ESG performance of Chinese firms cross-listed in Hong Kong. Motivation Empirical evidence on the real effects of ESG reporting, especially in emerging countries, remains relatively scant. Our study extends previous studies on the real effects of ESG reporting, which predominantly focused on developed countries, to an emerging country in a cross-listing setting. The test hypotheses Drawing on stakeholder theory, we hypothesized that the Hong Kong ESG disclosure mandate positively affects the ESG performance of cross-listed Chinese firms (H₁). We also tested whether this effect is more pronounced for firms under greater pressure from the media, analysts, and customers (H_2a, H_2b, and H_2c), and for politically connected firms and non-SOEs (H_3a and H_3b), than for their counterparts. We further tested whether the Hong Kong ESG disclosure mandate positively affects the ESG performance of non-cross-listed Chinese firms that operate in the same industry or are located in the same city as cross-listed Chinese firms (H_4a and H_4b). Targeted population Our sample consists of 2,434 firm-year observations between 2011 and 2021 (excluding 2016). Adopted methodology The study employed a difference-in-differences approach along with propensity score matching. Analyses We performed tests to assess the validity of the parallel trend assumption and conducted a battery of robustness checks, including the use of different fixed effects, alternative samples, alternative measures of ESG performance, and different PSM approaches. Findings The results show that the Hong Kong ESG disclosure mandate has a positive effect on the ESG performance of cross-listed Chinese firms. This effect is particularly evident in the governance and environmental aspects of ESG, but not observed in the social dimension. Further, we found that firms under greater pressure from the media, analysts, and customers experience a stronger positive effect of the mandate. The effect is also more pronounced for politically connected firms and non-SOEs than for their counterparts. Additionally, non-cross-listed firms operating in the same industry or in the same city also show improvements in ESG performance following the mandate, suggesting a spillover effect. However, further analyses show that the ESG performance of cross-listed Chinese firms is still lower than that of local Hong Kong firms, which suggests that the mandate does not completely supplant the effects of the regulatory environment in mainland China.