Too Much of a Good Thing in ESG Ratings? Evidence from Chinese A-Share Market during COVID-19

Abstract

This study investigates how ESG ratings relate to stock returns and whether the association exhibits a too-much-of-a-good-thing effect. We examine 789 Chinese A-share listed firms during the COVID-19 outbreak, a period marked by a sharp market decline. Using a 5-factor model and quantile regression, we provide evidence on whether such a non-linear “too-much-of-a-good-thing (TMGT) effect” pattern exists in China—an issue that has not been directly tested in prior research.

Our empirical results show that, during the COVID-19 market crash, the effect of ESG ratings on stock excess returns among mainland Chinese listed firms follows a too-much-of-a-good-thing (TMGT) pattern. Specifically, ESG ratings are positively associated with excess returns when ESG ratings are low, but the association turns negative when ESG ratings are high. This suggests that simply increasing ESG investment does not necessarily improve firms’ financial performance or market value. Instead, firms should aim for an optimal level of ESG investment, because overinvestment in ESG may harm financial performance and market value.