Abstract

With the concept of environmental, social, and governance (ESG) gaining traction worldwide, firms are becoming increasingly transparent about their ESG practices to enhance their legitimacy. This study draws on signaling theory, stakeholder theory, and opportunism theory, and uses panel data from Chinese A-share listed firms from 2009 to 2022. It identifies a U-shaped relationship between ESG performance and stock price crash risk, indicating that the increase in ESG performance decreases stock price crash risk, but after reaching a threshold value, it increases the risk. Green innovation moderates this U-shaped relationship, reinforcing its effects. Meanwhile, earnings management plays a mediating role in this U-shaped relationship. Heterogeneity analyses reveal that the U-shaped relationship is significant in polluting industries, firms without the duality of chairperson and CEO, firms with high analyst coverage, and those under high market competition. The moderating effect of green innovation is particularly significant in firms with poor external legal environments and firms with positive management tone. Our findings provide novel insights and recommendations for policymakers, managers, and stakeholders to develop effective ESG policies.