ESG, Cultural Distance and Corporate Profitability: Evidence from Chinese Multinationals

Abstract

In recent years, the demand for social responsibility arising from sustainable development has led to the gradual formation of a global consensus on the concept of environmental, social and governance (ESG), which has a wide impact on corporate operations. Based on legitimacy theory, this study examines the impact of ESG on corporate profitability. In addition, it explores the effectiveness of cultural distance as a moderator in the relationship between ESG and corporate profitability. Using fixed effects and moderated effects models, this study analyses panel data of Chinese manufacturing multinationals from 2014 to 2021. The results show that ESG significantly and positively affects corporate profitability and that the impact of ESG on corporate profitability is significantly and positively moderated by cultural distance. The research results are expected to provide meaningful insights into the importance of ESG and the factors to be considered by firms in their cross-border investment decision making.