Does Patient Capital Crowd out the Stabilizing Benefits of ESG? Evidence from Corporate Investment Volatility

Abstract

The market imperfection hypothesis posits that market frictions undermine economic efficiency and amplify economic fluctuations. As an emerging corporate evaluation framework and behavioral norm, ESG (environmental, social, and governance) performance helps mitigate such market imperfections. This study empirically examines the impact of corporate ESG performance on investment volatility and its underlying mechanisms. Using panel data from Chinese listed companies, we find that higher ESG ratings significantly reduce corporate investment volatility. Mechanism tests reveal that ESG practices curb investment fluctuations through two key channels: alleviating information asymmetry and reducing agency costs, thereby addressing fundamental market frictions. Moderating effect tests indicate that patient capital suppresses the smoothing effect of ESG on corporate investment volatility. Heterogeneity analysis further demonstrates that this stabilizing effect is more pronounced in non-state-owned enterprises, larger firms, and financially constrained firms. These findings highlight the economic value of ESG practices in promoting corporate investment stability and provide relevant insights for policy design and market participants.