Work

Noise reduction or idiosyncratic information? ESG performance and stock price synchronicity in China

Year: 2026

Type: article

Abstract: As environmental, social, and governance (ESG) practices become increasingly central to corporate strategy, understanding their impact on capital market efficiency becomes crucial for investors and policymakers. This study examines the relationship between ESG performance and stock price synchronicity using data from Chinese A-share listed companies during 2010-2022. Employing two-stage least squares estimation with regional ventilation coefficients as instrumental variables, we find that ESG performance significantly reduces stock price synchronicity—a result more consistent with the idiosyncratic information hypothesis than with the noise reduction hypothesis that has dominated prior Chinese market studies. We further document a reverse channel whereby high synchronicity prompts firms to strengthen their ESG practices, suggesting that OLS-based estimates of the ESG–synchronicity relationship are likely subject to reverse causality bias; our instrumental variable approach addresses this endogeneity and provides a more credible identification of the causal effect. Mechanism analysis reveals that ESG performance operates through two channels: enhancing corporate innovation and attracting institutional investor investment, both of which facilitate the incorporation of firm-specific information into stock prices. Heterogeneity analysis shows that these effects concentrate among firms with higher analyst coverage, lower financial reporting quality, and private ownership—conditions under which ESG disclosure carries greater informational value for price discovery. These findings carry implications for the design of ESG disclosure standards and governance reforms aimed at enhancing capital market efficiency in emerging markets.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2026.105769

Authors: Dan Sun, Yiping Li

Institutions: Hunan Institute of Engineering, Xiamen University

Language: English

Topic: Corporate Social Responsibility Reporting

Subfield: Strategy and Management

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $1,930

Funders: Education Department of Hunan Province, National Natural Science Foundation of China, Natural Science Foundation of Hunan Province