Capital market internationalization and firms' ESG performance: Evidence from the inclusion of China A-shares in the MSCI Emerging Market Index

This paper explores the impact of capital market internationalization on firms' ESG performance, utilizing the event that China A-shares were officially included in the MSCI Emerging Market Index. Using a sample of A-share non-financial listed companies, we find strong evidence that the ESG performance of companies included in the MSCI Emerging Market Index has been significantly improved. This finding remains robust after several robustness checks and the adoption of instrumental variables to circumvent endogeneity issues. Heterogeneity analysis shows that this effect is only significant for non-state-owned firms, firms located in provinces with higher levels of marketization, and firms in eastern cities. Further analysis verifies that the inclusion of China A-shares in the MSCI Emerging Market Index promotes firms' ESG performance by promoting institutional holdings and enhancing external supervision. Our findings shed light on the possible impact of capital market internationalization on corporate behavior in emerging markets.