Employee stock ownership plans and corporate environmental, social, and governance performance: evidence from China

Employee stock ownership plans (ESOPs), as institutional arrangements for enterprise owners to share the ownership of the enterprise and the right to future earnings with employees, facilitate the balance of stakeholders' interests and stimulate employees' motivation. Despite the attention and widespread practice of ESOPs by firms, their relationship with environmental, social, and governance (ESG) performance has not been explored yet. This paper examines the relationship between ESOPs and ESG performance using a sample of 13,299 firm-year observations from Chinese A-share listed firms between 2014 and 2021. The findings are as follows: (i) ESOPs have a positive impact on corporate ESG performance; (ii) ESOPs primarily enhance corporate ESG performance by fostering long-term orientation and improving internal control quality; (iii) from the internal governance perspective, the influence of ESOPs on ESG performance is particularly notable in firms with a small supervisory board size and a high level of agency costs; (iv) from the external environmental perspective, the impact of ESOPs on ESG performance is more significant in firms characterized by low market competition intensity and a favorable legal environment. This research reveals the effect of ESOPs in advancing corporate ESG performance and expands the literature on the motivation of stakeholders to drive corporate sustainability.