Short-selling and corporate ESG performance: evidence from China

Purpose - Sustainable development requires companies to achieve a long-term balance between the economic, environmental and social spheres in their development process, and is not limited to long-term commercial success. Enhancing corporate environmental, social and governance (ESG) performance plays a critical role in achieving sustainable economic and social development. The purpose of this study is to empirically examine the influence of short-selling on corporate ESG performance and unravel the mechanisms involved. Design/methodology/approach - The authors use the data from Chinese A-share listed companies spanning from 2010 to 2021 as the research sample and conduct empirical research using mediating effect model, instrumental variables and difference-in-differences methods. Findings - The findings suggest that short-selling has a positive impact on ESG performance, thus, contributing to the realization of sustainable development goals (SDGs) and achieving a balanced development of economy, environment and society, rather than only promoting corporate longevity. This can be attributed to short-selling’s ability to strengthen supervision constraints on firms, improve firms’ intrinsic capabilities and promote firms’ green technological innovation. Furthermore, the ESG-enhancing effects of short-selling are contingent upon the internal and external governance levels of the firms. That is, short-selling has a more significant effect on ESG performance enhancement for firms with weaker internal and external governance. The extended analysis finds that concerning firms’ market advantage, the positive impact of short-selling on ESG is more pronounced for firms with weak monopoly power and those facing intense industry competition. In addition, when examining firms’ individual characteristics, the ESG-enhancing effect of short-selling is more potent for nonstate-owned firms, those with a shorter listing history and those facing a heightened risk of resource mismatch. Practical implications - This study provides theoretical support and empirical evidence from the perspective of short-selling to help boost corporate ESG development and improve corporate contributions to sustainable development. ESG is the concrete projection of sustainable development concept at the firm level. Good ESG performance contributes to the realization of the SDGs by influencing the strategy, operation and management of the enterprise, and promoting the enterprise to more actively create the comprehensive value of the economy, society and environment. Social implications - The results of this study show that short-selling can significantly enhance corporate ESG performance and strengthen corporate sustainability initiatives, thereby promoting the realization of SDGs at the firm level. These findings carry substantial implications, not only foster the improvement of China’s capital market system but also provide empirical evidence from China for capital market policy-making and sustainable development practices in other emerging markets. Originality/value - This study not only addresses the gap in studying ESG performance from the perspective of short-selling behavior but also enriches the research on the economic consequences of short-selling and enriches the literature on the determinants of ESG performance.