How Does ESG Performance Affect Corporate Financial Violation? A Social Identity Perspective

ABSTRACT Preventing corporate financial violation is crucial for safeguarding investors' interests and promoting the sustainable development of businesses. Applying social identity theory, this study investigates the relationship between environment, social, and governance (ESG) performance and corporate financial violation through the moderating effects of executive characteristics. Based on a sample of 4881 listed firms in China from 2012 to 2021, this study finds that ESG performance is significantly and negatively associated with both the likelihood and severity of corporate financial violation. Moreover, executives' financial background strengthens this negative relationship, while executives' equity incentives weaken this relationship. We further find that the negative association between ESG performance and corporate financial violation is more pronounced in regions with a more developed market environment and stronger stakeholder‐oriented culture. Additionally, firms with higher ESG performance experience shorter violation detection time. We contribute to the business ethics and corporate finance literature by highlighting that firms' ESG performance positively influences executives' social identification, thus reducing corporate financial violation. We also provide a new rationale for firms to develop ESG practices and curb corporate violation.