Going Sustainability: The Impact of Free Trade Zone Establishment on Corporate Green Governance Performance

ABSTRACT This study uses the establishment of Pilot Free Trade Zones (PFTZ) as a quasi‐natural experiment, analyzing data from A‐share listed companies in Shanghai and Shenzhen from 2009 to 2022. A staggered difference‐in‐differences (DID) model is applied to examine the impact of PFTZ on firms' green governance performance (GGP). The results show that PFTZ significantly enhance GGP, with robust findings after parallel trend tests, placebo tests, and addressing endogeneity. Mechanism analysis reveals that PFTZ improve GGP through two key mechanisms: “conceptual governance” and “process governance.” The conceptual governance mechanism strengthens firm's environmental and social responsibility awareness, while the process governance mechanism enhances management efficiency and fosters green innovation and transformation, thereby improving green governance quality. Heterogeneity analysis indicates stronger effects in high‐pollution industries, firms with greater reputational capital, regions with advanced green finance infrastructure, and eastern regions. Furthermore, regional environmental regulatory intensity and public environmental awareness positively moderate this effect. The establishment of PFTZ also expands corporate access to sustainable financing, supporting balanced environmental and economic outcomes. This study provides valuable insights for policymakers to promote firms' green transformation within PFTZ.