The Role of Ownership Structure in the Relationship Between Environmental, Social, and Governance Practices and Financial Reporting Quality: Evidence from China

Abstract

This study examines the relationship between environmental, social, and governance (ESG) practices, financial reporting quality, and ownership structure in Chinese listed companies, based on a panel dataset of 1841 firm-year observations from 2016 to 2020. Using three types of panel regression analyses, the study finds a positive relationship between ESG performance and financial reporting quality. Notably, this positive relationship between ESG performance and financial reporting quality is evident only for state-owned enterprises (SOEs), while no significant relationship is observed for private firms (non-SOEs). When ESG is disaggregated into its sub-dimensions, environmental performance shows a positive relationship with financial reporting quality in SOEs, while no significant relationship is found for social and governance performance. This study contributes to the literature by providing empirical evidence on the relationship between ESG practices and financial reporting quality, with a focus on the role of ownership structure in shaping this relationship in an emerging market with government-led sustainability initiatives. The findings reveal significant differences in the integration of ESG considerations into financial reporting based on ownership structure, highlighting the prominent role of SOEs in promoting sustainable business practices and enhancing financial transparency.