Abstract
This study focuses on China’s institutional environment and uses an institutional isomorphism framework derived from institutional theory to scrutinize the drivers behind corporate environmental, social responsibility, and corporate governance (ESG) peer behavior and its implications for firm value. The study reveals that Chinese listed firms exhibit a peer effect in their ESG practices, yet distinct institutional environments significantly influence the motives and efficacy of corporate ESG peer behavior. Coercive isomorphic pressures can lead firms to blindly imitate ESG practices, consequently impairing firm value. Within the framework of imitative isomorphism, firms situated within the mid-range of industry profitability demonstrate the most pronounced enhancement in firm value through their ESG imitation behavior. In the context of normative isomorphism, it is evident that in markets with lower regulatory standards, there is an exacerbation of the speculative phenomenon of corporations excessively mimicking ESG practices, ultimately resulting in a detrimental impact on firm value.
Introduction
In recent years, societal concerns related to sustainable development, such as climate change, income inequality, and public health crises, have become universal challenges faced by humanity (Fang & Hu, 2023). The integration of environmental, social responsibility, and corporate governance (ESG) encapsulates the triad of economic progress, environmental conservation, and social fairness within sustainable development, offering a practical framework to address a range of challenges, including the COVID-19 pandemic, climate change, and economic downturns (H. Xie & Lv, 2022). As the importance of ESG grows, corporate ESG practices have become strategically significant. However, considerable debate surrounds the relationship between ESG practices and corporate value. Some scholars argue that investing in ESG practices increases costs, shifts strategic priorities away from profit maximization, and potentially harms performance and value (Di Giuli & Kostovetsky, 2014; Gillan et al., 2021). In contrast, others suggest that ESG practices can enhance intangible assets such as reputation, corporate culture, and human capital, benefiting stakeholders and ultimately driving corporate value (X. Li & Xu, 2022; Linlin et al., 2022). Furthermore, ESG practices can reduce costs, alleviate financial constraints, and drive revenue growth, leading to improved corporate performance (Albuquerque et al., 2019).
Despite significant efforts to unravel the interactions between ESG practices and corporate value, an important research gap exists. The majority of existing studies primarily focus on the mechanisms by which independent corporate ESG practices affect firm value, such as through resource acquisition or environmental adaptation (Liang & Renneboog, 2017; Shantaram et al., 2019). These studies, however, commonly conceptualize companies as self-contained decision-making entities without focusing on the organizational interactions shaped by institutional contexts (Abeysekera & Fernando, 2020). According to Fan et al. (2022), individual behavioral decisions can be influenced by other similar individuals in the environment. In reality, enterprises exist within complex institutional frameworks, where the behavioral decisions of companies are interdependent, and the influence of peer behavior and power dynamics plays a critical role in shaping corporate actions. However, research on peer effects regarding corporate ESG practices remains relatively limited. Thus, our question centers on: How do peer effects and institutional pressures shape ESG practices, and how do these dynamics affect corporate value?
Emerging market contexts are particularly underexplored in this respect. Unlike the well-regulated institutional regimes of developed economies, firms in emerging markets operate under conditions of institutional instability, which cause variations in how they respond to environmental, coercive, mimetic, and normative incentives in adopting ESG practices (DasGupta, 2022). Companies in emerging markets must navigate a higher degree of institutional opacity, where reactions to peer ESG behaviors are likely to differ extensively depending on localized institutional pressures and stakeholder expectations (Sun & Zhao, 2024). This study argues that a sound understanding of corporate ESG practices necessitates integrating peer effects with institutional isomorphism theory within specific contexts. Existing researches highlight the propensity of entities for reference-based behavior, suggesting peers undergo shared behavioral changes when faced with environmental uncertainties, exhibiting convergent traits over time (Dougal et al., 2015; L. Xie et al., 2022). In ESG practices, such peer effects go beyond imitation and legitimacy-seeking, as they are embedded in localized institutional pressures, such as coercive state-driven regulations, normative calls for transparency, and mimetic strategies for stakeholder legitimization. The organizational isomorphism theory within the field of new institutionalism posits that contemporary organizations exhibit substantial similarities in structure and operation, driven by coercive, normative, and mimetic isomorphism (DiMaggio & Powell, 1983). Accordingly, this study contributes by applying institutional isomorphism theory within the context of ESG engagement in emerging markets. Corporate ESG peer behaviors reflecting coercive, normative, and mimetic isomorphism evolve differently under institutional heterogeneity, shaping consequential variances in corporate value. This perspective highlights the pressures faced at the organizational level and the differing motivations and outcomes of ESG practices across diverse regions and with varied external expectations (J. Xie et al., 2019).
The Chinese institutional environment provides an excellent context for studying the impact of corporate ESG practices. China has increasingly emphasized the importance of corporate ESG practices, which are anticipated to become a significant factor in determining corporate value in the future (Fang & Hu, 2023; X. Li & Xu, 2022). However, ESG practices remain a relatively novel concept in China. Consequently, the ESG practices of peer companies become a critical benchmark for focal firms, potentially motivating imitation and generating ESG practices peer effects. Nevertheless, the economic and institutional environments across various provinces in China differ significantly. Factors such as the development goals of local governments and the characteristics of enterprises lead to varying institutional pressures experienced by companies, which in turn may result in diverse motivations for mimicking ESG practices. This scenario provides a suitable context for this study to explore ESG practices under different institutional pressures. Currently, most ESG practices research is concentrated on developed economies. Due to weaker formal institutions and less stringent regulatory environments, ESG in emerging markets has not received the attention it deserves (Bahadori et al., 2021). However, an increasing number of studies now recognize that under-researched economies in Asia, Africa, Eastern Europe, the Middle East, and Latin America significantly impact global sustainability (Ortas et al., 2019). As the largest developing economy, examining ESG practices in Chinese companies can offer valuable insights for ESG research in emerging markets.
This study makes several contributions to the ESG literature, particularly in the context of emerging markets. First, This study extends the traditional understanding of institutional isomorphism theory by integrating institutional context. It explores how various forms of institutional pressures (coercive, mimetic, and normative) collectively shape corporate ESG behaviors. We move beyond internal, firm-level explanations of ESG practices (L. Wang, Fan & Zhuang, 2023, offering a more comprehensive understanding of how external institutional forces affect corporate decision-making and value outcomes. Second, the study addresses the contradictory findings in existing literature regarding the impact of corporate ESG practices on firm value. The result demonstrates that the effect of ESG peer behavior on firm value varies significantly across institutional contexts, emphasizing the importance of institutional heterogeneity in shaping the outcomes of ESG practices. This challenges the one-size-fits-all perception of ESG’s benefits (Bissoondoyal-Bheenick et al., 2023), highlighting the need for context-sensitive analyses and offering insights into how companies can align their ESG practices with strategic goals rather than pursuing them solely for legitimacy. Finally, The conclusions of this study drawn offer significant references for the calls from scholars for more ESG research in economies outside of Europe and the United States (Ortas et al., 2019). Particularly, some scholars argue that under conditions of information opacity and policy instability, companies in emerging markets have not become the preferred choice for ESG focused investors (C. Chen et al., 2023). This study comprehensively elaborates on the antecedents and consequences of corporate ESG behaviors against the institutional backdrop of China, thereby providing a new perspective for these investors to understand the ESG behaviors of companies in emerging markets.
Theoretical background and hypothesis development
Theoretical background
The ESG practices for Chinese enterprises
ESG, introduced by the United Nations in 2004, has undergone a transformation in both scope and significance over time. Corporate ESG practices have emerged as vital assessment criteria for aligning economic and social values within enterprises and redefining traditional business paradigms. In response to global climate concerns, the Chinese government, during the 2020 Central Economic Work Conference, made a solemn pledge to the dual carbon goals, with the aim of reaching the peak of carbon emissions by 2030 and achieving carbon neutrality by 2060 (30/60 goal). As China embarks on a new phase of development, strategies such as high-quality development and common prosperity have taken center stage. Chinese listed companies, at the forefront of economic and social progress, play a pivotal role in advancing national strategies and attaining sustainable development. Currently, the “30/60” goals are being systematically integrated into various enterprises, with comprehensive ESG practices disclosures gradually becoming a pivotal reference for public assessments. From a governmental perspective, corporate ESG practices align with China’s strategic focus on high-quality development. Requiring enterprises to disclose their ESG practices is anticipated to strengthen regional industrial planning and advance the pursuit of dual carbon objectives. From a corporate perspective, entities possessing ESG advantages will experience heightened benefits in areas such as tax incentives, social reputation, policy subsidies, and investor attraction, all of which contribute to the overall value enhancement of the enterprise. Consequently, corporate ESG practices align with the prevailing trend of societal governance envisioned by the government (X. Zhang & Ma, 2022).
Institutional isomorphism
Existing research indicates that institutional pressure is a primary driver for companies to engage in sustainability-related behaviors (Pedersen & Gwozdz, 2014; Tian & Liu, 2021). When companies are embedded in different institutional fields simultaneously, they often face conflicting institutional pressures, which increase the risk and uncertainty of strategic behaviors. New institutional theory posits that when organizations experience conflicts with external organizational fields, they undergo a state of constraint and legitimacy choice. If reduced legitimacy increases organizational crisis (X. Wang & Ning, 2020), organizations will adopt convergent behaviors and alter their cultural-cognitive differences with the organizational field, complying with institutional pressures to enhance the consistency of strategic behaviors. New institutional theory uses the concept of “institutional isomorphism” to emphasize that companies must comply with certain rules and regulations to obtain specific resources necessary for organizational survival; otherwise, they risk losing legitimacy (Al-Omoush, 2024). This provides a valuable framework for exploring the peer effects of ESG practices under different institutional pressures.
Some researchers have also explored corporate imitation behaviors under legitimacy pressure and uncertainty through new institutional theory, leading to institutional isomorphism. These studies have found significant differences in companies’ imitation motivations and measures under different institutional scenarios, such as coercive isomorphism, normative isomorphism, and mimetic isomorphism (Hao et al., 2012; Pache & Santos, 2013; H. Yang et al., 2012). Vashchenko (2017) also argues that corporate ESG practices are influenced by institutional norms from society, the environment, and stakeholders. The ESG practices peer effect exhibited by companies is a strategic response to the external environment. However, this perspective primarily examines corporate behavior at the organizational level without delving into the underlying motivations under different institutional contexts. Given that coercive, normative, and mimetic isomorphism comprehensively cover three scenarios of imitation behavior under institutional pressure and have been widely recognized, this article analyzes the boundary effects of corporate ESG practices peer effects within the Chinese institutional environment from the perspective of institutional isomorphism. By combining the peer effect mechanisms triggered at the corporate level with the broader environmental context, we can gain a more comprehensive understanding of the true motivations driving corporate ESG practices and the resulting value outcomes.
Peer effects on ESG practices
When considering managers’ motives, they may aim to address perceived shortcomings in their capabilities, safeguard their reputation, and deflect attention from adverse corporate news through alignment with industry ESG standards. Initially, owing to information asymmetry, external investors cannot depend solely on investment outcomes; they must also assess managers’ level of effort based on behavioral similarities and publicly available information (Jensen, 2002). To obtain higher assessments, managers frequently set aside their own information and mimic others (Palley, 1995). This imitation serves to elevate managers’ standing. Consequently, given the uncertainty regarding ESG practices benefits and costs, aligning ESG practices decisions with those of peer companies is the optimal way for managers to mitigate their own effort levels. Furthermore, China’s current ESG evaluation system requires further refinement, and diverse institutions have not yet established a unified framework for ESG assessment. In an uncertain environment, companies can expeditiously gain legitimacy by imitating their peers’ ESG practices, consequently bolstering relationships with resource providers. Previous research has shown that imitating for status-seeking purposes can be beneficial for both the company and its stakeholders, even if the behavior being imitated does not inherently align with the company’s best interests (Westphal & Shortell, 1997). Finally, ESG practices within companies are becoming a pivotal factor in stakeholders’ perceptions of the enterprise. Some companies confronted with negative reports or marked by substantial pollution can conform to industry standards by issuing ESG practices reports that favor their own systems. This, to some extent, aids in diverting attention from negative news coverage, affording companies latitude for “greenwashing” practices.
From a competitive standpoint, companies closely observe the behavior of their peer enterprises and respond proactively to sustain a relatively competitive position or counter aggressive actions from their rivals. On the one hand, from a favorable perspective on ESG practices, the actions undertaken by companies in this realm function as dual-purpose endeavors: long-term investment in conveying positive corporate value and a method of engaging in market competition. ESG practices enhance transparency and credibility, consequently reducing agency costs and alleviating information asymmetry (K. C. W. Chen et al., 2009; Dhaliwal et al., 2011). Consequently, companies with high ESG ratings are more likely to acquire resources at lower costs. When focal firms recognize that losing their ESG advantage would put them at a disadvantage in external competition, this incentive prompts them to align their ESG level with that of their peers, thereby ensuring equal competitiveness in acquiring financing (C. Li & Wang, 2022). Conversely, from a negative standpoint on ESG, ESG practices can entail direct costs, such as those related to preparing and disseminating information, and indirect losses, potentially resulting in a loss of competitive advantage (Gjergji et al., 2021; Prencipe, 2004). When companies in an industry realize that ESG practices may affect a company’s performance and value, this can result in an industry-wide bias toward lower ESG practices. This scenario can have a contagious effect on focal companies, diminishing their inclination to ESG practices.
From an informational learning perspective, companies believe that their peers possess superior information. Consequently, they are inclined to align their decision-making with that of their peers to augment the effectiveness of their own decisions. Considering that the process of independently analyzing proprietary information by managers for decision-making is both time-consuming and labor-intensive, learning aids them in acquiring valuable knowledge and experience for decision-making, thereby mitigating the uncertainty associated with decisions. Particularly in highly uncertain environments, prompt action is crucial, and decision-makers are more inclined to formulate decisions by referencing precedents through learning (Ma et al., 2021). Despite the uncertainty surrounding the valuation impact of ESG practices, peer companies demonstrate tangible ESG effects and offer a robust guiding signal for the entire industry. This is because the ESG practices and disclosure of companies in the industry can exemplify the investments and accomplishments of companies in realms such as charitable donations and environmental protection initiatives, which are easily observable and verifiable (Russo & Fouts, 1997). Consequently, this diminishes the expense incurred by focal companies in aggregating and interpreting ESG information. Managers of companies can comprehend the precise actions taken and the outcomes attained through such conduct based on industry disclosures of ESG practices. This affords greater leeway for judgment in corporate decision-making. Corporate decisions can evaluate the merits and drawbacks of such practices based on ESG practices in the industry, facilitating emulation. Consequently, we posit that companies proactively mimic the ESG behavior of their peers to alleviate the costs and risks linked with corporate decision-making.
The boundary utility of institutional isomorphism on peer effect of firm ESG practices
The peer effect of firm ESG practices in a coercive isomorphism system
Coercive isomorphic institutional pressure arises from the formal and informal influences exerted on an organization by the other entities it depends on. This encompasses regulatory systems that govern organizational operations, chiefly materializing as constraints, regulations, and adaptations in behavior (DiMaggio & Powell, 1983). In the course of institutional transformation in China, the government holds substantial authority for political intervention. It allocates distinct social responsibilities and institutional statuses to enterprises, mandating their adherence to the relevant institutional influences. In reciprocation, enterprises that conform to these institutional requisites gain corresponding legitimacy advantages (Hailin, 2014).
Unlike Western free-market economies, China’s economy has developed within the framework of a distinctive socialist system overseen by the government. Especially for state-owned enterprises, Chinese political system and development strategy assume a normative role in overseeing their conduct, akin to formal institutions (NI, 2019). State-owned enterprises, which serve as the principal instruments for government market regulation, symbolize and embody socialist public ownership, shouldering an innate obligation for societal public services (H. Yu et al., 2021). Therefore, the motivations of state-owned enterprises regarding ESG practices are deeply intertwined with their political mandates (Qu et al., 2021). They are not only required to pursue economic goals but also to act as vital collaborators with the government in social governance. This dual responsibility results in a stronger ESG peer effect among state-owned enterprises, as their leaders are often government officials whose career progression is influenced by governance performance. When the overall ESG practices of their industry improves, the leaders of state-owned enterprises are likely to intervene actively to enhance their own company’s ESG practices, thus reinforcing the peer effect (Shi & Wang, 2023).
In contrast, private enterprises experience different motivations regarding ESG peer effects. While they are also subject to governmental oversight, their reliance on government authority is less pronounced compared to state-owned enterprises (Y. Chen & Liu, 2024). As a result, private enterprises are primarily motivated by market positioning and reputation (Qian et al., 2024). They seek to enhance their brand image and cater to the growing consumer demand for corporate social responsibility (CSR). In addition, private firms often engage in ESG practices voluntarily, driven by competitive advantage rather than coercive pressures. Although they may benchmark against their peers, the external institutional pressures they face are comparatively less stringent. Based on the above analysis, this study proposes the following:
The peer effect of firm ESG practices in a mimetic isomorphism system
Mimetic isomorphism originates in the attempts of organizations to reduce external uncertainty and ambiguity through imitation of peer behaviors (DiMaggio & Powell, 1983). Under uncertain conditions, organizations look to other comparable entities in their field as benchmarks for decision-making, particularly for actions that carry long-term and complex implications such as ESG adoption. Uncertainty over the immediate financial returns of ESG practices drives firms to observe the actions of peers to validate or justify their own adoption of similar behaviors, thus aligning themselves with institutional pressures and securing legitimacy.
In China’s institutional environment, corporate profitability is a critical variable influencing a firm’s capacity and tendency to mimic peer ESG practices under mimetic isomorphic pressures (Liu & Lu, 2018). ESG practices, by nature, requires substantial investment in environmental, social, and governance domains, often demanding consistent allocation of funds and other resources over extended periods (Lin et al., 2023). The profitability of firms thus determines their ability to engage in such long-term practices and conditions how institutional pressures motivate ESG imitation. Firms with different levels of profitability respond to mimetic pressures in varying ways.
On the one hand, when profitability is low, enterprises face substantial resource constraints, which limit their ability to invest in discretionary efforts unrelated to immediate survival, such as ESG practices. These firms tend to allocate their limited resources to short-term financial recovery efforts rather than long-term or uncertain ESG practices, despite observing peer firms reaping reputational gains or access to stakeholder resources through their own ESG efforts. For firms with low profitability, mimicking ESG practices of peers also introduces significant risks by exacerbating existing resource scarcity and potentially leading to inefficiencies (Q. Wang et al., 2023). Consequently, the peer effect of ESG practices on such firms weakens, as imitating peers may threaten rather than benefit their survival.
On the other hand, firms with high profitability typically occupy industry-leading positions. Their profitability affords them independence in decision-making, freeing them from needing to mimic competitors to demonstrate legitimacy or improve their market position. Such firms often rely on differentiation strategies to align their long-term ESG investments with their established strategic priorities rather than merely imitating peers (Ma et al., 2021). Furthermore, highly profitable firms often have good relationships with their stakeholders. Consequently, these firms are less influenced by mimetic pressures, as they have fewer dependencies on peer adoption of ESG practices to demonstrate legitimacy or capabilities.
In contrast, firms with moderate profitability are uniquely positioned to strongly experience the peer effect of ESG practices. These firms possess adequate financial resources to invest in ESG activities without undermining their operational integrity or exposing themselves to excessive financial risk. At the same time, moderate-profitability firms do not possess the competitive independence enjoyed by leading profitable firms, making them more motivated to imitate successful ESG examples set by peers. The normative and reputational pressures derived from observing peer engagement in ESG practices compel moderate-level firms to use mimicry to improve institutional legitimacy, align with stakeholder expectations, and gain access to shared market resources. Furthermore, imitation offers an efficient middle ground for these firms to mitigate external uncertainty and internal risks, making them more responsive to mimetic isomorphic pressures compared to firms at either profitability extreme (Wan et al., 2016).
From the perspective of mimetic isomorphism, profitability conditions a firm’s capacity and incentives to mimic peer behavior. While firms with excessively low profitability are constrained by resource deficits, and firms with high profitability are less sensitive to conformity pressures, moderately profitable firms are optimally positioned. These firms align mimicry with both sufficient available resources and the need for competitive legitimacy within institutional environments. As such, profitability simultaneously drives the extent to which firms adopt ESG practices and underpins the nature of their response to peer behavior. Based on the above analyses, this study proposes the following hypothesis 3:
The peer effect of firm ESG practices in a normative isomorphism system
Normative isomorphism refers to the influence of shared norms, values, and cultural expectations on organizational behavior, often taking the form of voluntary compliance rather than external regulatory obligations. It exerts pressure on firms to adhere to the socially accepted practices and standards promoted by professional bodies, industry groups, or societal stakeholders, ultimately driving them to conform to prevailing mores in pursuit of legitimacy and social approval (Gibbs & Kraemer, 2004). The extent to which normative pressures influence corporate behaviors is shaped by contextual factors, including cultural and economic conditions, which define the extent and consistency of the norms that firms are expected to follow (H. Yang & Wu, 2015; H. Zhang & Huang, 2022).
The marketization level of a region plays a crucial role in determining the strength and impact of normative isomorphic pressures (L. Zhao & Zhang, 2020). Marketization refers to the extent to which normative commercial principles, ethical standards, and institutional practices are established, promoted, and internalized within a region (Cai, 2016). High levels of marketization foster well-developed market norms, transparency, public accountability, and a culture in which organizations face heightened pressure to adopt ESG practices. This pressure is derived from increased societal awareness, media scrutiny, policymaker expectations, and investor preferences for responsible business behavior. Conversely, in areas with low marketization levels, weaker institutional norms mitigate normative pressures, reducing the degree to which firms conform to ESG-related peer behaviors.
In regions with high marketization levels, such as China’s developed coastal and urban areas, ESG practices are deeply embedded into corporate strategy, reflecting prevailing cultural and societal priorities such as transparent corporate governance, environmental sustainability, and stakeholder engagement. These areas often emphasize the integration of high-quality development policies with strong attention to sustainable and social goals. Firms operating in such regions face significant normative isomorphic pressures driven by the highly participative public, a vigilant media environment, and active industry institutions. For these firms, ESG practices are not only viewed as a demonstration of corporate responsibility but also as an essential strategy to maintain legitimacy and competitiveness (Jiang et al., 2024). Y. Wang and Xu (2018) argue that firms in these regions are more likely to adopt socially responsible strategies because ESG-related standards have become iteratively disseminated across the institutional environment, facilitating widespread social acceptance. As a result, firms readily mimic successful ESG behaviors among peers out of both necessity and strategic alignment with broader institutional expectations.
Conversely, in regions with low marketization levels, such as rural interior areas or less-developed western provinces of China, institutional environments place greater emphasis on short-term economic growth rather than sustainability or CSR (Z. Zhou & Lei, 2023). Stakeholders, including consumers, governments, and communities, exhibit weaker support or awareness of ESG principles, thus diluting the pressures stemming from normative expectations. This weakened normative isomorphism results from less pervasive communication channels, slower adoption of national policy initiatives related to green and sustainable development, and a general prioritization of output-driven economic activities over long-term responsible behaviors. When normative standards are not as embedded or championed in an institutional environment, firms operating within such settings exhibit weaker responses to their peer organizations’ ESG practices. Public attention, an essential factor in creating external ethical expectations, also diminishes in these contexts, further weakening peer-driven ESG spillover effects. Based on this reasoning, the following hypothesis is proposed:
The economic consequences for the peer effect of firm ESG practices under different institutional backgrounds
Corporate ESG practices, as a strategic approach, reflect companies’ typical responses to external competition. From a corporate perspective, when formulating a strategic action, it is essential to consider how this action will impact the firm’s value. Existing research has explored the relationship between corporate ESG practices and firm value from perspectives like financing constraints and market competitiveness, and generally finds a positive correlation between corporate ESG practices and firm value (Feng & Wu, 2023; Wu & Yang, 2024). Institutional isomorphism drives firms to adopt similar behaviors in order to seek legitimacy and competitive positioning within their environment. However, based on the hypotheses outlined above, the peer effect of corporate ESG practices varies across different institutional contexts. In these contexts, some firms voluntarily engage in ESG practices, while others do so under regulatory pressure. There is limited research exploring whether these ESG peer behaviors, under different forms of institutional isomorphic pressure, contribute to enhancing firm value.
Coercive isomorphic pressures arise from regulatory mandates or government actions that enforce certain corporate behaviors. In the context of ESG practices, state-owned enterprises are often subject to such pressures, as governments impose mandatory sustainability and governance requirements. Under these circumstances, corporate ESG behaviors may not stem from strategic intent or competitiveness but rather from compliance-driven motives. State-owned enterprise, in particular, may adopt ESG practices to meet external targets or policy requirements rather than integrate them into a cohesive, long-term strategy (L. Guo & Su, 2017). As a result, the peer effects of ESG practices in coercively governed environments often lack deep alignment with firms’ intrinsic goals or value-enhancement strategies. This misalignment weakens ESG’s ability to sustainably enhance firm value, suggesting that the financial returns on ESG peer effects in coercive settings are likely minimal.
In highly competitive and uncertain environments, mimetic isomorphism compels firms to emulate peers that are perceived to have successfully undertaken ESG practices. This imitation allows firms to reduce uncertainty, signal legitimacy to external stakeholders, and align themselves with industry-recognized sustainable practices. However, the financial value generated from ESG peer effects under mimetic isomorphism is not uniform and is significantly influenced by a firm’s profitability level. Profitability determines both a firm’s capacity to allocate resources toward sustainable practices and its motivation for embracing peer-influenced ESG strategies. For low-profitability firms, resource constraints severely limit their ability to effectively adopt and integrate ESG practices, even when such practices have yielded positive outcomes for peers. Imitation in this context can stretch limited financial resources and lead to inefficiencies, as the costs associated with ESG implementation may overwhelm immediate returns. For high-profitability firms, while sufficient resources exist to adopt peer-inspired ESG practices, the incentive for imitation often diminishes. These firms, typically occupying leadership positions or competitive advantages in their industries, often prioritize differentiation over conformity. Although mimetic ESG practices in these firms may showcase strategic sophistication, their positive impact on firm value can be marginal or limited. High-profitability firms focus more on defining industry benchmarks rather than following them and thus derive less direct value enhancement from mimetic ESG alignments. Thus, mimetic isomorphic pressures and ESG peer effects serve as strongest positive drivers of firm value among moderate-profitability firms, where optimal resource allocation and external competitiveness converge. For low-profitability firms, limited resources reduce the capacity to capitalize on ESG practices’ financial benefits, while high-profitability firms, driven by differentiation priorities and reduced peer dependence, derive comparatively weaker enhancements from peer-influenced ESG alignment.
Normative isomorphism emerges primarily from shared values, social norms, and investor or stakeholder expectations. In regions with higher levels of marketization, the peer effect in these environments exerts a voluntary, institutionally embedded influence, compelling firms to adopt ESG practices as an integral aspect of their strategy rather than compliance (H. Zhang & Huang, 2022). This can generate greater financial returns as normative-driven ESG practices align more effectively with long-term stakeholder expectations, improving the firm’s reputation, market trust, and investor confidence. Furthermore, in highly marketized regions, the social and cultural consistency around ESG creates an environment in which firms’ ESG adoption translates predictably into enhanced valuation. In contrast, in regions with weaker normative pressures or low levels of marketization, a lack of broad societal established standards may soften such peer effects, reducing the potential for substantial firm value enhancement through ESG engagement. Therefore, we propose hypothesis 5:
Methodology
Data and sample selection
The sample for this study consists of publicly listed companies in China. The data were gathered from three distinct databases. Initially, data on corporate governance and financial performance were acquired from the China Securities Market and Accounting Research (CSMAR) database. The primary advantage of using this database stems from its status as the largest repository of information concerning listed companies in China. It provides comprehensive details regarding governance and financial performance (Ye & Li, 2021). Second, data on environmental, social, and governance (ESG) practices for enterprises were gathered from the ESG database on the China National Research Data Sharing Platform (CNRDS). This database encompasses detailed scores for companies across the three ESG dimensions. Third, this study employs Bloomberg’s ESG data as an alternative ESG variable for robustness. The Bloomberg ESG Index meets our requirements as it provides ESG practices scores for over 3,600 companies across 73 countries, including China, with coverage expanding at an annual rate of 11%–12% (Siew, 2015). Unlike most non-continuous, rating-based scores, such as AAA, AA, A, B, the Bloomberg ESG Index offers a comprehensive, continuous scoring system, making it highly suitable for this study as an alternative measure for the dependent variable. In addition, recent studies have utilized Bloomberg’s ESG data as a source for ESG-related research, further underscoring the reliability of this dataset (Z. Li & Li, 2023). Due to a substantial number of missing values in Bloomberg’s ESG data for Chinese listed companies between 2006 and 2010, this study, based on data availability, selects 2011 as the initial year. Considering that the relevant variables in the subsequent analysis are lagged, we selected samples from the period of 2011 to 2021.
The sample excluded firms that had incurred significant losses for three consecutive years or had received delisting announcements from the China Securities Regulatory Commission. By combining financial and ESG data from these databases, unbalanced panel data comprising 7236 samples spanning the period from 2011 to 2021 were obtained. Table 1 presents the industry distribution of the sample. As shown in the table, the majority of firms in the sample belong to the manufacturing sector, accounting for 58.39% of the total. Given that manufacturing firms typically exhibit prominent characteristics in the realm of ESG (Environmental, Social, and Governance), they serve as ideal subjects for studies on ESG practices.
Distribution of the sample of firms.
Variables
Dependent variables
Based on the hypotheses, this study’s empirical analysis comprises three main sections. First, we examine whether firms exhibit ESG peer behavior. Second, we analyze whether ESG peer behavior varies across different institutional isomorphism scenarios. Finally, we investigate the impact of ESG peer behavior on firm value under these diverse institutional scenarios. Thus, this study includes two dependent variables: the ESG practices of focal firms and firm value.
We use the ESG database from the China Research Data Service Platform (CNRDS) as the source for ESG practices data. This database provides information on firm-level practices in the environmental, social responsibility, and corporate governance dimensions. Following previous research (Yi et al., 2022), we use a content analysis approach to score firms’ ESG practices. When a firm engages in a specific ESG project, we assign a value of 1; otherwise, we assign 0. The environmental dimension includes eight positive indicators and two negative indicators (environmental violations and pollutant emissions). The social responsibility dimension consists of nine positive indicators and two negative indicators (financial disputes and employee safety issues). In the corporate governance dimension, there are eleven positive indicators and two negative indicators (accounting violations and product disputes). Table 2 details the specific items for each ESG dimension. Since a firm’s ESG performance is jointly reflected in the three dimensions of environment, social responsibility, and governance (T. Li, 2024), we follow Borghesi et al. (2014) by summing the positive indicators for each ESG dimension, subtracting the negative indicators, and then dividing by the total number of indicators to determine the overall ESG practice level for each listed firm. To examine the effect of ESG peer behavior on firm value under different institutional pressures, we employ TobinQ as a proxy for firm value, in line with established methods used in previous studies (W. Yang & Yang, 2016).
Dimension of ESG practice evaluation.
Figure 1 illustrates the average ESG scores, as well as the scores for each individual component (E, S, and G), of the sample firms over the period from 2011 to 2021. As shown in the figure, the overall ESG scores have increased annually, driven primarily by a combination of factors, including policy promotion, market demand, heightened corporate responsibility awareness, and technological advancements, which collectively foster a positive shift toward sustainable development among firms (Y. Wang et al., 2024).
The average ESG practice scores of firms in the sample during the period from 2011 to 2021.
Independent variables
Previous researchers have used the average CSR score of firms within the same industry, excluding the focal firm itself, as an independent variable to assess CSR peer effects (Leary & Roberts, 2014). In this study, we adopted a similar approach by using the ESG scores of firms in our sample to determine the average ESG score within the same industry (Industry_ESG, excluding the focal firm). Based on the industry classification standard established by the China Securities Regulatory Commission in 2012, our sample is categorized into nine industries, as shown in Table 1. In addition, our research investigates the expression and outcomes of corporate ESG peer behavior across different institutional scenarios. Given the regional variations in institutional environments across China, firms in the same region often exhibit ESG imitation behavior. Therefore, we measured the average ESG score of firms operating in the same region (Region_ESG, excluding the focal firm itself). Following the methodology of Huo et al. (2023), we defined regional firms according to the province of their registered headquarters, with the final sample spanning 31 provinces in China. Given the potential lag in corporate peer behavior, this article selects the ESG scores of focal firms with a one-period lag.
Moderating variables
This study takes into account the variations in the peer behavior of enterprises among different institutional contexts. To validate this, the study incorporated the following moderating variables: (1) we distinguished between state-owned and private enterprises based on whether the enterprise is state-owned (coded as 1) or non-state-owned (coded as 0). (2) Corporate profitability, measured by return on equity (ROE). (3) The level of marketization in the enterprise’s operating environment. This study employs regional marketization indices from X. Wang et al. (2021)’s China Marketization Index (Market) to assess the degree of business environment standardization and institutional regulation across various regions. This measurement method has been widely adopted by numerous Chinese scholars (Dai, 2016; Y. P. Yu & Liu, 2018). The marketization index comprehensively captures multiple dimensions, including the relationship between government and market, the development of product and factor markets, the maturity of intermediary organizations, and the legal environment. A higher marketization index indicates a more standardized, transparent, and fair competitive environment, where government intervention is minimized, and firms operate under market-driven principles. In such environments, companies’ ESG practices are more likely to be viewed as strategic choices aimed at building reputation and gaining investor trust, rather than responses to direct government influence. This aligns with normative isomorphism, as companies in high-marketization regions adopt ESG behaviors as a way to signal responsible, market-oriented practices to stakeholders. Given China’s vast regional diversity in institutional profiles, the marketization index serves as a meaningful indicator of these differing business environments and their influence on corporate ESG behavior.
Control variables
We selected control variables from five dimensions: firm characteristics, asset structure, operational performance, corporate governance structure, and ownership structure. For firm characteristics, we used firm size (Size), as larger companies are typically considered to have more resources available for ESG investments (Wu, 2006). In terms of asset structure, we included the debt-to-asset ratio (Alr) and cash ratio (Cash) as measures. The debt-to-asset ratio reflects a firm’s financial leverage, where a higher ratio may indicate greater debt repayment pressure, potentially leading the firm to prioritize short-term financial goals over ESG practices investment (Barnea & Rubin, 2010; H. Yu et al., 2024). The cash ratio, on the other hand, represents liquidity, with a higher value suggesting sufficient cash resources that can be flexibly allocated to ESG-related initiatives, including employee welfare and CSR (S. Li & Wen, 2025). For operational performance, we used revenue growth rate (Income), which serves as an indicator of a firm’s growth capability. Firms with higher growth potential are often better positioned to allocate resources for ESG efforts (D. Zhou et al., 2024). The operational leverage of a company reflects its business risk (Risk). When a firm faces high operational risks, especially under increased external uncertainties or internal management pressures, the “social” and “governance” dimensions of ESG are likely to receive greater attention (M. Guo et al., 2023). Regarding corporate governance structure, centralized decision-making, such as when the same individual serves as both chairman and CEO (Dual), was considered important for consistent and efficient ESG strategy implementation, especially when the leader holds a clear ESG stance (S. Li & Lu, 2020). Finally, for ownership structure, we selected the shareholding ratio of the largest shareholder (Shareholder) as a variable, as dominant shareholders often drive firms to respond swiftly to ESG-related market trends and competitive pressures (G. Li, 2024). Details of the above variables are provided in Table 3.
Variable definitions.
Model design
The ESG practices of firms can vary across firms and years. Considering that Industry_ESG and Region_ESG represent two distinct mechanisms influencing ESG practices, with Industry_ESG capturing peer benchmarks and dynamics within specific industries and Region_ESG reflecting the impacts of regional policies, cultural expectations, or institutional influences, combining these variables may obscure their respective roles. By analyzing them independently, we aim to clearly identify whether it is industry effects or regional dynamics that primarily drive corporate ESG practices. In the context of controlling firms and years, we test the impact of Industry_ESG and Region_ESG on focal firms’ ESG practices by constructing panel fixed effect regression model based on the above variables. All variables are embedded in the most complete version presented in Eq. (1) and (2), where the control variables are replaced by Controls. I and t represent the corresponding enterprise and year, respectively.
Institutional isomorphism essentially exhibits a strong layered characteristic in its operational patterns under the three types of pressures. In this context, introducing interaction terms may increase model complexity and make result interpretation more challenging. In contrast, adopting a grouped regression approach provides a more intuitive way to present results and facilitates the discussion of differences between groups, making it a more straightforward and logically consistent choice for this study. Drawing on the bootstrapping method proposed by Efron and Tibshirani (1994), this study conducts significance tests on inter-group coefficient differences by grouping the indicators corresponding to different types of institutional isomorphism. This approach highlights the variations in ESG peer effects across different institutional isomorphism contexts.
Building upon Eq. (1) and (2) as the theoretical framework, this study adopts the following methodology to rigorously examine the three institutional isomorphism scenarios under investigation. To verify hypothesis 2, panel fixed-effects regression analyses were conducted separately for the two sample groups, and the results are presented in Equations (3) and (4).
When examining Hypothesis 3, this study divides the sample into three intervals (below the 30th percentile, between the 30th and 70th percentiles, and above the 70th percentile) for analysis. The results are presented in Equations (5) and (6).
In validating hypothesis 4, companies are classified into high and low groups based on the marketization index scores of their respective operational regions, followed by the execution of grouping panel fixed effect regression analyses.
In order to verify the impact of ESG peer effect on firm value under different institutional environments, this study draws upon the methodologies employed by previous scholars and formulates panel fixed effect regression model to scrutinize the influence of corporate ESG peer effects on firm value (Q. Li & Liang, 2020; Wu et al., 2022). The definitions of the remaining variables are consistent with those in Eq. (1–8). In this regression, special emphasis is placed on the coefficient of the interaction term (Industry_ESGi,t/Region_ESGi,t × Focal firm’s ESGi,t) to probe the influence of ESG peer behavior on the TobitQi,t + 2 of focal firms. Given that the impact of corporate strategic actions on firm value might exhibit a certain lagged effect, this study employs a one-period lagged TobitQi,t + 2.
Results analysis
Descriptive and correlation analysis
The table below presents the descriptive statistics and correlation analysis for the key variables in this study. As shown in Table 4, the average ESG score for companies in the sample is 1.061, with a standard deviation of 0.425, indicating relatively consistent ESG scores among the sampled companies. The mean for state enterprises is 0.585, indicating a prevalence of non-state-owned companies in the sample. Regarding the correlations among the variables, the correlation coefficients between enterprise ESG scores and Industry_ESG and Region_ESG scores were 0.557 and 0.312. This provides initial support for the presence of peer effects. To mitigate potential issues of multicollinearity that could affect the empirical results, this study conducted a check using variance inflation factors (VIFs). The average VIF is 1.46, with the highest value being 2.25. All the VIF values were well below 10. Therefore, multicollinearity was not a significant concern.
Descriptive and correlation analysis.
Note: ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.
Regression results
Table 5 presents the panel regression analysis of the focal firm’s ESG scores. The coefficients for Industry_ESG and Region_ESG are 0.320 and 0.299, respectively, both of which are significant at the 1% level. Therefore, we posit that both the industry’s average ESG score and the region’s average ESG score substantially enhance the ESG performance of focal firms, confirming the presence of a peer effect on corporate ESG. Hypothesis 1 is verified. Upon examination of the coefficients for average ESG scores obtained through industry and region, we observe that the coefficient for Industry_ESG surpasses that for Region_ESG. This phenomenon may be attributed to the globalization of corporate competition, resulting in less intense competition among firms within the same region. Capital moves more freely across regions, emphasizing competition primarily at the industry level. Therefore, the average ESG score within the same industry has a more pronounced stimulating effect on enhancing the focal firm’s ESG performance.
Regression analysis of the ESG peer effect.
Note: The t-statistics are shown in parentheses.
Robustness test
Testing for substitution variables
This study used alternative dependents from Bloomberg to verify the robustness of our results. Table 6 reports tests for alternative dependent variables. The results of the Industry_ESG and Region_ESG coefficients are consistent with those in Table 5. These results provide further support for hypothesis 1.
Robustness tests using alternative measures of the dependent variable.
Endogeneity test
Estimating peer effects poses numerous challenges, including the reflection problem (Manski, 1993). This positive correlation may stem from the endogenous selection of firms entering peer groups or the oversight of common factors (Leary & Roberts, 2014). Consequently, companies within the same peer group tend to share similar characteristics, including shared ownership, common analysts/auditors, and potentially overlapping directors. Furthermore, similar economic and institutional environments, along with the impacts of macroeconomic policies, may contribute to collective ESG behavior among these companies. To address potential endogeneity issues, this study references existing research and employs the stock returns of other companies within the same industry (Industry_stock return) and region (Region_stock return) as instrumental variables for analysis (Leary & Roberts, 2014). This choice is substantiated by the following reasons. First, the stock returns of other companies within the same industry and region reflect their own intrinsic information, thereby isolating the influence of external macromarket and industry-specific factors. Moreover, a significant correlation exists between stock returns and corporate ESG practices, meeting the criterion of relevance.
Table 7 reports the regression results for the instrumental variables. In the first-stage regression, the coefficients for Industry_stock return and Region_stock return are 0.193 and 0.095, respectively, both of which are significant at the 1% level. In addition, the weak instrumental variable test using the Cragg-Donald Wald F statistic exceeds the critical value provided by Stock and Yogo (2005) for tolerating a 10% distortion, indicating the absence of weak instrumental variable issues. In the second-stage regression, the correlation coefficients for Industry_ESG and Region_ESG are 0.981 and 1.993, respectively, both of which are significant at the 1% level. These results indicate that even after controlling for the influence of common factors at the industry and regional levels, a substantial industry and regional peer effect persists in corporate ESG behavior. Hypothesis 1 is validated again.
Robustness tests using instrumental variables.
Testing the firm ESG peer effect in a coercive isomorphism system
This article categorizes the ownership attributes of companies in the sample into two types: state-owned and private. We contend that state-owned enterprises will be at the forefront of ESG practices due to the mandatory requirements stemming from government policy execution. The results in Table 8 indicate that the coefficient of Industry_ESG for state enterprises is 0.358, while for private enterprises, it is 0.256, both of which are significant at the 1% level. The empirical p-value for the inter-group coefficient difference test is.039, which is less than.05, indicating that the coefficient of Industry_ESG in the state-owned enterprise sample is significantly higher than that in the private enterprise sample. Similarly, in the case of Region_ESG, the coefficient for state-owned enterprises is 0.418, while it is 0.250 for private enterprises. The empirical p-value is also less than.05, suggesting that there is a significant difference in the Region_ESG coefficients between the two samples. The result shows a stronger peer effect among state-owned enterprises than among private enterprises. Hypothesis 2 is verified. This suggests that SOEs may be more driven to conform to peer practices due to regulatory pressures rather than solely strategic motivations.
Regression results of the ESG peer effect for enterprises with different property rights.
Testing the firm ESG peer effect in a mimetic isomorphism system
Considering that a company’s ESG imitative behavior may be influenced by performance pressures, this study categorizes companies in the sample into three intervals based on profitability within their respective industries (below the 30th percentile, between the 30th and 70th percentiles, and above the 70th percentile) for analysis. The regression results, as shown in Table 9, reveal that when a company’s profitability falls below the 30th percentile or exceeds the 70th percentile of its industry, the coefficients for Industry_ESG are 0.307 and 0.191, respectively, both of which are significant at the 10% level. When a company’s profitability falls within the 30th to 70th percentile range, the coefficient for Industry_ESG is 0.328, which is significant at the 1% level. The inter-group coefficient difference test reveals that the coefficients of Industry_ESG in the samples with profitability below the 30th percentile and above the 70th percentile are both significantly smaller than those in the sample ranging from the 30th to 70th percentile. This indicates that the peer effect of corporate ESG performance is more pronounced when a company’s profitability lies in the middle range of its industry. Similarly, employing Region_ESG as the independent variable leads to a similar conclusion. Therefore, we posit that a company’s profitability influences its ESG imitative behavior. When a company’s profitability is less than the industry average, it encounters fewer imitative isomorphic pressures than performance-related pressures. Consequently, companies are more inclined to allocate resources to enhancing their suboptimal performance rather than to emulating similar ESG practices. Similarly, when a company’s profitability is high, its inclination to imitate ESG practices is relatively low. Only when a company’s profitability falls within the middle of its industry does the resulting peer effect become most pronounced, thus validating Hypothesis 3.
Regression analysis of the ESG peer effect for enterprises under different profit scenarios.
Testing the firm ESG peer effect in a normative isomorphism system
Table 10 presents the influence of industry/region average ESG performance on focal firms under different marketization levels. The results indicate that the coefficients of Industry_ESG in the groups with low and high levels of marketization are 0.344 and 0.225, respectively, and are statistically significant at the 1% and 10% levels. The test for inter-group coefficient differences shows an empirical p-value of.042, which is less than .05, indicating that the peer effect of ESG practices within the same industry is more pronounced in groups with a lower level of marketization. Similarly, in the regression model using Region_ESG as the independent variable, the same results are observed. This result contradicts Hypothesis 4. Considering the regional context in China, it is plausible that in regions with weaker institutional environments, where economic development tends to be less robust, corporate ESG behavior may be subject to intervention by regional governments. Specifically, driven by the incentive of “political competition,” local governments are strongly motivated to intervene in the market to showcase their political achievements. Government officials stimulate corporate ESG behavior to enhance the overall image of the region, thereby emphasizing that the region’s development aligns with China’s policy of high-quality development. In regions with more favorable institutional environments, the transparency of market mechanisms and the reduced significance of local government achievements diminish the motivation for intervention by local government officials. In addition, the relationship between the government and enterprises tends to be more intricate in regions with lower levels of marketization, increasing the likelihood of companies engaging in rent-seeking behavior through nonrational ESG actions to obtain additional external resources.
Regression analysis of the ESG peer effect for enterprises in different marketization levels.
Testing the economic consequences of the ESG group effect under different institutional backgrounds
Table 11 shows the regression results for the impact of corporate ESG peer behavior on firm value across diverse ownership structures. The results show that the interaction coefficient between Industry_ESG and the focal firm’s ESG in the state-owned enterprise sample is –0.390, while in the private enterprise sample it is 0.256, with only the latter being significant at the 5% level. Furthermore, the empirical p-value for the inter-group coefficient difference test is less than.05, indicating that the ESG peer effect’s promotion of firm value is significantly stronger in private enterprises compared to state-owned enterprises. The interaction coefficients of Region_ESG and the focal firm’s ESG also yield the same conclusion across the two groups. This result suggests that the ESG peer effects in state enterprises may not be an effective strategy but rather a result of government pressure. This is particularly evident when using the regional average ESG as a benchmark for comparison. Owing to the competitive dynamic among regional officials, state enterprises, which function as governmental representatives in the market, engage in peer behavior without accounting for actual developmental trends. This leads to counterproductive outcomes for firm advancement.
Testing the economic consequences of ESG peer behavior under different property rights attributes.
Similarly, to assess the impact of firms’ imitative behavior on their value at different profit levels, this study categorized firms according to their profit performance relative to industry benchmarks. The above analytical findings reveal that when firms’ profits decrease below the 30th percentile of the industry, the ESG performance of focal firms remains unaffected by the regional average ESG performance. Consequently, this scenario is omitted from subsequent analysis. The regression results are presented in the Table 12. When firms’ profit percentiles are within the mid-range of the industry (30%–70%), the coefficients of the interaction terms between Industry_ESG, Region_ESG, and Focal firm’s ESG are all positively significant (β = 0.674, p < .1; β = .823, p < .1). However, when profits exceed the 70th percentile of the industry, the interaction term coefficients are not significant (β = .313, p > .1; β = –0.726, p > .1). Furthermore, when profits are below the 30th percentile, the interaction term coefficients are negatively significant (β = –0.334, p < .05). The empirical p-value for the inter-group coefficients also indicates that the ESG peer effects of firms with profitability percentiles in the middle range of the industry are the most effective in promoting value growth. These findings suggest that firms’ ESG peer behavior must align with their developmental trajectory. For firms situated at the lower and upper echelons of the profit spectrum, imitating ESG practices does not yield the intended benefits. In situations where resources are limited, the blind imitation of ESG practices veers away from rational strategic decisions, ultimately exerting a negative influence on the firm’s value.
Testing the economic consequences of ESG peer behavior under different profit situations.
Table 13 shows that when firms operate in regions with high levels of marketization, the interaction terms between Industry_ESG, Region_ESG, and the Focal firm’s ESG are all positively significant (β = 0.127, p < .05; β = 0.719, p < .01). However, in regions with lower levels of marketization, the interaction terms are either insignificant or negatively significant (β = 0.373, p > .1; β = –0.481, p < .1). The empirical p-value for the inter-group coefficients indicates that ESG peer effects in regions with a higher level of marketization are more effective in significantly promoting firm value. This seems to validate the aforementioned rent-seeking effect. When firms engage in rent-seeking behavior by improving their ESG practices or presenting a positive image to the government, they have greater opportunities to receive support and assistance from the government. In such an environment, a firm’s ESG peer behavior is more likely to embody a speculative and opportunistic approach that is not aligned with the firm’s strategic development. In a well-functioning market environment, a firm’s ESG peer behavior more accurately exemplifies a phenomenon propelled by free-market competition. Thus, in comparison with enterprises situated in regions characterized by higher marketization indices, the impact of a firm’s ESG peer behavior on firm value enhancement may be less conspicuous for those situated in regions characterized by lower marketization indices.
Testing the economic consequences of ESG peer behavior under different marketization levels.
Conclusion and discussion
In the current social context, the ESG behaviors of enterprises are of paramount importance for their development. This study takes Chinese listed companies as samples and investigates the motivations behind ESG conformity behaviors and their economic consequences within the Chinese institutional framework. The research yields the following findings. First, Chinese enterprises exhibit a peer effect on ESG behaviors. ESG levels within the same industry and region can promote the growth of focal enterprises. Second, when focal enterprises imitate ESG practices within the same industry or region, the peer effect of ESG performance exhibits heterogeneity under different institutional scenarios. Specifically, under the coercive isomorphism system, the results indicate that state enterprises demonstrate more significant peer effects than do private enterprises. This is attributed to the pressure faced by state enterprises from the government’s demands for social governance. Within the mimetic isomorphism system, we observe that the peer effect of enterprises is influenced by their own competitiveness. When profitability is low, rational business owners are less inclined to emulate ESG practices within the industry. This consideration stems from the uncertainty associated with the continuous investment of resources in ESG practices and the resulting returns. Similarly, when enterprises find themselves in higher percentiles of industry profitability, there is a lack of motivation to proactively emulate industry ESG practices to enhance competitiveness.
However, in the context of normative isomorphism, our research reveals that enterprises in regions with better market environments exhibit lower peer effects compared to those in regions with less-developed market environments. This finding contradicts our hypothesis 4 that posited a stronger ESG peer effect in more marketized regions. We propose that this unexpected result can be attributed to the significant influence of local government intervention in corporate ESG behavior, particularly in the unique institutional context of China. In the current context of China’s initiatives toward carbon neutrality and sustainable development, ESG actions taken by firms align closely with government policy objectives. This alignment leads to a symbiotic relationship between local governments and enterprises, where corporate ESG practices not only contribute to social governance but also bolster the perceived performance of the government (H. Zhou et al., 2019). Consequently, local governance institutions are significantly motivated to leverage their authority to encourage corporate participation in ESG activities. According to Xu and Liu (2020), firms often proactively align their strategies with governmental demands to ensure continuous engagement with local authorities, effectively assuming social responsibilities that would typically fall within the purview of the government. This strategic alignment can engender competitive behaviors among firms, as failing to meet governmental expectations may lead to the withdrawal of support and resources, thereby rendering previous investments in ESG initiatives ineffective. In addition, in regions with lower levels of marketization, the extent of government intervention tends to be more pronounced (Duan & Huang, 2020; Zhong & Du, 2019). This heightened intervention can result in a stronger influence of peer behavior among local enterprises, where firms feel greater pressure to conform to the ESG practices of their competitors. Thus, the phenomenon of ESG mimicry is exacerbated in these environments, leading to more pronounced peer effects among firms operating under weaker institutional frameworks.
Finally, we examined the economic consequences of corporate ESG peer effects under different institutional scenarios. The study revealed starkly contrasting effects on firm value between state-owned and private enterprises in terms of their ESG peer behaviors. This result confirms that ESG behaviors in state enterprises serve as an effective tool for government policy implementation without aligning with the enterprises’ development strategies. In other words, the ESG peer behavior of state enterprises reflects a superficial endeavor on the part of the government. When considering the impact of peer behaviors on firm value at different levels of profitability, only enterprises with profitability levels in the mid-range of the industry benefit from engaging in ESG emulation behavior to enhance firm value. Our research revealed that when firms’ peer behaviors in the context of ESG practices do not align with their actual operation circumstances, these behaviors not only constitute a waste of resources but may even have a counterproductive effect. When considering the economic consequences of corporate ESG peer behaviors under a normative isomorphism system, the study revealed that ESG peer behaviors in enterprises in environments with poor market conditions do not enhance firm value. This is especially true when using the regional average ESG level as the benchmark for emulation, which can have a negative impact on firm value. This result aligns with the hypothesis that enterprises in regions with poor market environments engage in ESG behaviors for rent-seeking purposes or to conceal negative events. In such an environment, the ESG peer behavior of enterprises is more likely to be a speculative and opportunistic endeavor, which, however, does not lead to an improvement in firm value.
Theoretical contribution
This study provides significant theoretical contributions to the growing body of ESG literature. First, it adopts the theoretical framework of sociological new institutionalism to analyze how Chinese institutional forces drive corporate peer behaviors in ESG and their economic consequences. Unlike prior studies that often emphasize competition or information-sharing motives, this research incorporates the institutional environment, exploring the varied pressures (coercive, mimetic, and normative) influencing firms’ ESG behaviors in China’s distinct context (W. Zhao et al., 2022). This approach reveals how institutional settings shape peer conformity in ESG practices, adding depth to the understanding of ESG motivations and broadening the analytical framework for future studies.
Second, our findings emphasize institutional heterogeneity as a critical factor in determining ESG’s impact on firm value. This study demonstrates that ESG peer effects on firm value vary significantly across institutional isomorphism scenarios, especially under differing levels of government influence and market maturity. By underscoring these distinctions, the study challenges the one-size-fits-all perception of ESG’s benefits, aligning with recent calls for context-sensitive analyses (Cheng et al., 2024; E. P-y. Yu et al., 2018). In particular, our findings suggest that companies should align ESG activities with strategic goals rather than pursue them solely for legitimacy. This highlights the nuanced role of institutional contexts, expanding the current literature’s understanding of ESG in emerging markets.
Finally, this research provides a unique perspective on the motivations behind ESG behavior in emerging markets, which are often marked by unique governance demands and state pressures. Rather than viewing ESG solely as a legitimizing activity (Daugaard, 2020; Ortas et al., 2019), our findings illustrate the interplay between government expectations and corporate conformity in China’s ESG activities. This has implications for international standard-setters and offers a more holistic framework for understanding ESG behavior, one that considers not just performance outcomes but also the broader motivations and challenges associated with ESG investments in diverse institutional environments.
Practical implications
This study offers several meaningful practical insights for academia, corporate managers, and policymakers, shedding light on the complex interactions between institutional forces and corporate ESG practices in emerging markets. First, this study encourages academics to delve deeper into how localized institutional factors—such as government policy influence, normative expectations, and market development—shape peer-driven ESG behaviors. This perspective can expand current ESG theories to more accurately capture the nuanced motivations and outcomes of ESG practices across diverse global contexts. Second, managers are encouraged to adopt a balanced approach: while it may be beneficial to pursue government-aligned ESG activities in high-intervention regions, excessive focus on compliance-based ESG could detract from long-term goals. This research suggests that companies benefit most from ESG initiatives that are both strategically aligned and sustainable, helping to avoid resource allocation toward ESG activities that may not contribute to genuine value creation. By taking a selective approach to ESG engagement, managers can enhance both their social credibility and competitive standing in a way that supports lasting corporate growth. Third, policymakers are advised to consider the regional variations in marketization and government influence, which can either drive or hinder authentic ESG engagement. By crafting policies that recognize local market maturity and government intervention levels, regulators can promote genuine corporate responsibility that aligns with sustainable development goals. For policymakers looking to implement ESG frameworks globally, this study suggests that a “one-size-fits-all” approach may not yield the desired outcomes. Rather, ESG policies should be tailored to each region’s institutional dynamics to support a balanced model that fosters authentic ESG engagement while reducing the risk of opportunistic conformity.
Limitations and avenues for future research
The limitations of this study provide valuable insights for future research. First, while this article examines the impact of three distinct institutional isomorphism scenarios on corporate ESG peer behavior within the context of China’s institutional environment, it is important to acknowledge the significant institutional diversity across regions in China. This diversity can lead to varying interpretations and implementations of ESG practices, which may influence our findings. Future research could benefit from exploring these regional differences in more detail. Second, this article does not disaggregate corporate ESG behavior. Corporate ESG practices encompass three facets—environmental, social responsibility, and governance—each involving engagement with different stakeholders. The differing emphasis that companies place on these dimensions suggests variations in their preferences among specific stakeholders. Consequently, future research on corporate ESG peer behavior might scrutinize the degree of imitation in each dimension, facilitating a more thorough examination of corporate motives and objectives. In addition, future studies should consider comparative analyses between emerging and developed regions. Such research could illuminate both the similarities and differences in corporate ESG behaviors, providing a broader understanding of how institutional contexts shape corporate responsibility across varied economic landscapes.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This study was supported by the Natural Science Research Start-up Foundation of Recruiting Talents of Nanjing University of Posts and Telecommunications (grant no. NYY223033), General Project of Philosophy and Social Science Research in Universities of Jiangsu Province (2024SJYB0106).
