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Vol.:(0123456789)
Review of Managerial Science
https://doi.org/10.1007/s11846-024-00817-2
ORIGINAL PAPER
Employee stock ownership plans andcorporate
environmental, social, andgovernance performance:
evidence fromChina
XiangruiZeng1
Received: 23 January 2024 / Accepted: 25 September 2024
© The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature 2024
Abstract
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.
Keywords Stakeholder theory· Stakeholder-agency theory· Corporate governance·
Employee stock ownership plans· ESG performance
JEL Classification M40
* Xiangrui Zeng
zengxiangrui98@yeah.net
1 School ofManagement, Xi’an Jiaotong University, No. 28, Xianning West Road, Xi’an710054,
ShaanxiProvince, China
X.Zeng
1 Introduction
The environmental protection, social responsibility, and corporate governance
advocated by environmental, social, and governance (ESG) are of great significance
in guiding corporate sustainable development (Kotzian 2023; Lokuwaduge and
Heenetigala 2017), enhancing corporate value (Tampakoudis and Anagnostopoulou
2020), and mitigating business management risks (Galletta and Mazzù 2023).
Therefore, companies have placed greater importance on their ESG activities
and have augmented their investment in sustainable development plans. A survey
conducted by IBM Business Value Research Institute reveals that 76% of surveyed
executives consider ESG as the cornerstone of their business strategy, while 72%
perceive ESG as a revenue enabler rather than a cost burden.1
Academic research on the topic of ESG integration has experienced rapid growth
in recent decades. Most studies primarily focus on the financial and non-financial
impacts of ESG integration (Aouadi and Marsat 2018; Galletta and Mazzù 2023;
Hawn etal. 2018; Pedersen et al. 2021). Considering stakeholders as direct and
indirect participants in corporate ESG behaviors, their activities can influence
corporate ESG performance (Parmar et al. 2010). To examine the effects from a
stakeholder perspective, scholars have presented empirical evidence on corporate
sustainability performance from the viewpoints of shareholders, directors, and
executives (Aabo and Giorici 2023; Barko etal. 2022; Husted and de Sousa-Filho
2022; Nekhili etal. 2021). However, there is a dearth of literature on the impact of
employees on corporate ESG performance.
In recent years, an increasing number of companies have recognized the
significance of employees in business management and adopted employee
stock ownership plans (ESOPs) as incentives. ESOPs refer to the institutional
arrangements whereby an enterprise, in accordance with the wishes of its employees,
legally enables its employees to acquire shares of the company and hold them for a
long period of time, and the interests in the shares are distributed to the employees
in accordance with the agreement, aimed at enhancing employees’ intrinsic value
(Kong et al. 2024). By employing equity incentives, such as contracts, ESOPs
establish a strong alignment of interests between employees and the company,
thereby stimulating employee initiative, improving corporate governance, and
balancing employee-business conflicts (Fang et al. 2015; He et al. 2024; Kong
etal. 2024). For example, Apple in the US implements ESOPs for a small number
of core employees to share cash dividends and option gains. Huawei, an unlisted
Chinese company, has become one of the world’s top technology-based companies
by utilizing its employees’ initiative in technological innovation through ESOPs to
carry out technological innovation.
Extant literature has primarily concerned the consequences of ESOPs, such as
acquiring internal financing (Core and Guay 2001), enhancing firm performance
(Dasilas 2024; Fang etal. 2015), and declining employee turnover rates (Aldatmaz
etal. 2018), while fewer attention has been paid to corporate sustainability. Though
1 Data from the July 2023 IBM report, “The ESG Data Conundrum” (https:// www. ibm. com/ downl oads/
cas/ WDWAR BP8).
Employee stock ownership plans andcorporate environmental,…
several scholars (i.e. Kong et al. 2024; Zhou et al. 2022) examine the impact of
ESOPs on corporate social responsibility, and environmental engagement, whether
and how ESOPs impact corporate ESG performance remains unknown. Whereas
corporate ESG behaviors are of importance in achieving a balance between the
different domains of environmental protection, social development, and corporate
governance (Florez-Jimenez et al. 2024; Larcker et al. 2022), the relationship
between ESOPs and corporate ESG performance deserves to be addressed.
This study examines the influence of ESOPs on ESG performance using data
from Chinese listed companies. China provides an ideal context for investigating
this relationship. Firstly, ESOPs in China have developed over 40 years since
their initial introduction in the early 1980s (Zhou et al. 2022). Although ESOPs
encountered limitations due to economic development stages and policy deficiencies
during their early years, their advantages have gradually become prominent with the
robust growth of China’s economy (Kong etal. 2024). Since the China Securities
Regulatory Commission issued Guiding Opinions on the Pilot Implementation of
Employee Stock Ownership Plans by Listed Companies in June 2014, more than
one-third of listed companies in China had adopted ESOPs by the end of 2022.
Secondly, the development of ESG in China commenced relatively late, but it has
gained momentum in recent years (Li etal. 2023; Lu etal. 2024; Wang etal. 2023).
To regulate the disclosure of ESG information by listed companies, the China
Securities Regulatory Commission and stock exchanges have released documents
such as the Guidelines on Investor Relations Management for Listed Companies. As
of June 30, 2023, 1738 companies in China’s A-share market have released ESG-
related reports for the year 2022, accounting for 33.28%.2
Therefore, using data from A-share listed companies in China spanning from
2014 to 2021, this study explores the relationship between ESOPs and corporate
ESG performance. The findings reveal that ESOPs have a positive effect on
corporate ESG performance. Additionally, boosting long-term orientation and
improving internal control quality are the main mechanisms by which ESOPs
improve corporate ESG performance. The heterogeneity analysis shows that the
impact of ESOPs on improving ESG performance is more pronounced when the
supervisory board size is small, agency costs are high, market competition is low,
and the legal environment is favorable. The findings remain valid after a series of
robustness tests such as the propensity score matching method, alternative variable
measures, and alternative regression methods.
This research makes contributions to the existing literature. Firstly, this paper
contributes to the research on employee compensation and corporate sustainability.
Unlike previous studies (i.e. Jain etal. 2023) that primarily concerned the compensation
of executives, especially CEOs, this study focuses on the compensation of employees,
the key stakeholders of the firm. Although scholars have investigated the outcomes of
ESOPs such as internal financing (Core and Guay 2001), firm performance (Hochberg
2 Data from “Report on ESG Actions of Chinese Listed Companies (2022–2023)” jointly produced by
Daily Economic News and the International Research Institute of Green Finance of Central University of
Finance and Economics on August 16, 2023. (https:// iigf. cufe. edu. cn/ info/ 1014/ 7437. htm).
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and Lindsey 2010), and corporate governance (Aldatmaz etal. 2018; Blasi etal. 2016),
these studies have mainly focused on the U.S. research context and paid insufficient
attention to corporate sustainability. Although some scholars have explored the impact
of ESOPs on corporate social responsibility (Zhou et al. 2022), and environmental
engagement (Kong etal. 2024), the question of whether ESOPs affect corporate ESG
performance remains unexplored. Based on the Chinese research context, this paper
investigates the impact of ESOPs on corporate ESG performance, broadens the
research on employee compensation and corporate sustainability, and provides Chinese
evidence for the research on the consequences of ESOPs.
Secondly, this study enriches the literature on stakeholder engagement in global
ESG practices. While previous studies have predominantly highlighted the role
of stakeholders in corporate ESG practice from the perspectives of shareholders,
directors, and executives (Aabo and Giorici 2023; Barko etal. 2022; Husted and de
Sousa-Filho 2022; Nekhili etal. 2021), few studies have been conducted on the impact
of employees on corporate ESG performance while employees, as key stakeholders of
the firm, have more informational advantages about the firm’s operations compared to
other stakeholders (Huang etal. 2019). ESOPs are institutional arrangements to share
the right of ownership and future earnings of the firm with the employees, which can
cultivate their sense of participation and belonging, improve their work enthusiasm
and initiative, motivate them to independent learning and teamwork, and balance the
conflict of interest between employees and the firm (Aldatmaz etal. 2018; Baker etal.
1988; Fang etal. 2015; He et al. 2024). This study examines the impact of ESOPs
on corporate ESG performance in the Chinese context, highlights the critical role of
employees in promoting corporate sustainability, and further analyzes the moderating
role of China’s unique corporate governance structure and the external governance
environment, contributing to the research on stakeholder and global ESG practices.
Finally, this study contributes to extending stakeholder theory and stakeholder-
agent theory by revealing the mechanisms through which ESOPs affect corporate ESG
performance. Although stakeholder theory and stakeholder-agent theory have been
applied to account for the economic consequences of ESOPs (Chang etal. 2015; Fang
etal. 2015; Hochberg and Lindsey 2010; Oyer and Schaefer 2005), these studies have
not sufficiently addressed the mechanisms underlying the consequences of ESOPs.
Combining stakeholder theory and stakeholder-agency theory, this study further
investigates the mediating effects of long-term orientation and internal control quality
as well as the moderating effects of China’s unique internal and external corporate
governance environment on the basis of discussing the impact of ESOPs on corporate
ESG performance, which helps to open the black box of the impact of ESOPs on
corporate ESG performance, comprehensively show the power of ESOPs, and expand
the scenarios of stakeholder theory and stakeholder-agency theory.
Employee stock ownership plans andcorporate environmental,…
2 Theoretical framework
2.1 Theoretical development
This study integrates insights from stakeholder theory and stakeholder-agency
theory (Mayer and Sparrowe 2013) to analyze how ESOPs influence corporate
ESG performance. Stakeholder theory eschews a solely profit-centered
perspective and argues that firms should balance the conflicts of all stakeholders,
including shareholders, employees, consumers, suppliers, and communities, and
consider their interests fairly (Freeman 1984). Active stakeholder engagement,
such as communication with business managers and participation in decision-
making about company development, facilitates the achievement of long-term
organizational success and sustainability (Jones 1995; Parmar etal. 2010).
Corporate ESG behaviors are generally viewed as instrumental in shepherding
sustainable development (Florez-Jimenez et al. 2024; Kotzian 2023). Prior
studies emphasize the influence of external and internal stakeholders as key
factors in corporate ESG performance (Aabo and Giorici 2023; Barko etal. 2022;
Cornell and Shapiro 2021; Husted and de Sousa-Filho 2022; Nekhili etal. 2021),
but the literature overlooks how employees, as a stakeholder, influence corporate
ESG performance. Employees, as stakeholders who are more knowledgeable
about a firm’s operation and management activities, may have a greater impact
on corporate ESG performance compared to other stakeholder groups (Huang
etal. 2019). Thus, stakeholder theory offers insight into the role of employees
in corporate ESG behaviors, inspiring to think about how to achieve sustainable
corporate development from the internal employee perspective.
Furthermore, stakeholder‐agency theory (Hill and Jones 1992) is also used to
illustrate the conflict of interest that exists between employees and firms regarding
sustainability issues. According to this theory, employees and shareholders suffer
from agency concerns through conflict of interest (Eisenhardt 1989). Specifically,
employees, whose interests lie in owning stable claims in the form of salaries and
bonuses and whose careers are limited, tend to oppose managers’ investments that
diminish the value of the firm in the short run, even though these investments are
instrumental in increasing the firm’s value in the long run (Kong etal. 2024).
To eliminate conflicts of interest, ESOPs have been widely adopted as a
coordinating mechanism through upfront equity incentive arrangements (Bova
etal. 2015b). Prior research has addressed the motivations of firms to implement
ESOPs in terms of incentivizing employee initiative (Oyer and Schaefer 2005),
obtaining internal financing (Core and Guay 2001), and reinforcing counter-
acquisition (Pagano and Volpin 2005). ESOPs align employee compensation with
the firm’s future performance, not only providing employees with equity and its
benefits, but also incentivizing them to focus on the firm’s long-term value, which
can promote firm innovation (Chang etal. 2015), improve financial and operating
performance (Fang etal. 2015; Hochberg and Lindsey 2010), optimize corporate
governance (Blasi etal. 2016), and facilitate firms engage in environmental and
social behavior (Kong etal. 2024; Zhou etal. 2022).
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In general, the implementation of ESOP helps to utilize the information advan-
tage of employees to participate in the firm’s management while balancing the
conflict of interest between the employees and the company in terms of corporate
long-term sustainable development. Thus, by integrating the perspectives of stake-
holder theory and stakeholder-agency theory (Mayer and Sparrowe 2013), this study
constructs the theoretical model to explore the role of ESOPs in enhancing corpo-
rate ESG performance, the mechanism of long-term orientation and internal control
quality, and the moderating effect of the external and internal governance environ-
ment. The specific theoretical model is shown in Fig.1.
2.2 ESOPs andcorporate ESG performance
ESOPs, as a kind of corporate governance and incentive mechanism, give employees
the opportunity to acquire or purchase shares, which facilitates equalizing the
interests of stakeholders and motivating employees to actively contribute to the
firm’s long-term success and value creation (Kelso and Adler 1958; Oyer and
Schaefer 2005). The implementation of ESOPs has enabled employees to become
shareholders in the organization. As a result, employees have begun to concern
the long-term development and operational performance of firms since corporate
long-term sound development affects the vital interests of the employees (Bova
etal. 2015b; Wilhelm etal. 2024). ESG performance, which serves as the bedrock
for companies to attain long-term sustainable development, has increasingly
become imperative for listed companies to convey positive signals of sustainable
development to the market (Cabaleiro-Cerviño and Mendi 2024). This study argues
Fig. 1 Conceptual model. Note The conceptual model integrates stakeholder theory and stakeholder
agency theory to explore the relationship between employee stock ownership plans (ESOPs) and ESG
performance, and also examines the mediating role of long-term orientation and internal control quality
in the relationship between ESOPs and ESG performance as well as the moderating effect of the govern-
ance environment (e.g., supervisory board, agency costs, market competition, and legal environment) on
the relationship between ESOPs and ESG performance
Employee stock ownership plans andcorporate environmental,…
that ESOPs enhance corporate ESG performance by incentivizing stakeholder
initiative and calming conflicts of interest.
Stakeholder theory posits that employees, as vital stakeholders in enterprises,
possess specific interests linked to the development and operational performance
of enterprises (Freeman 1984). Employees promote the long-term success and
sustainability of the organization by developing their learning autonomy and
providing suggestions to business managers on company development issues based
on their own work practices (Parmar etal. 2010). However, employees do not always
participate actively in business development and management since they do not
directly benefit from the development of the corporate business (Wilhelm etal. 2024;
Zhou etal. 2022). ESOPs, as the institutional arrangements to share the ownership
of the enterprise and the right to future earnings with employees, make it possible
to resolve this conflict. Prior research (Aldatmaz etal. 2018; Baker etal. 1988; Fang
etal. 2015) has revealed that ESOPs foster a sense of engagement and belonging
among employees, increase their work enthusiasm and initiative, and motivate them
to learn independently and work in teams. This learning-motivation effect helps to
stimulate the collective power of employees to work together to drive long-term
corporate growth (Barko etal. 2022). For instance, Zhou etal. (2022) indicate that
ESOPs can expand the economic contractual relationship between employees and
the organization to a social contractual one, stimulating employees’ initiative and
active participation in corporate social responsibility practices. Moreover, ESOPs
deeply bind employees to the interests of the company, making them more focused
on their own interests (e.g., their physical health) and the long-term development
of the company, such as increasing the company’s environmental expenditures and
reducing carbon emissions (Kong etal. 2024).
In addition, from the stakeholder-agency theory perspective, employees’ limited
careers and interests in having stable claims in the form of salaries and bonuses do
not always coincide with the interests of shareholders and managers (Eisenhardt
1989; Hill and Jones 1992). As a result, employees are inclined to oppose managers’
sustainability investments because they reduce the value of the firm in the short
term, even if they help to increase the value of the firm in the long term (Kong
etal. 2024). Similarly, corporate ESG investments, while contributing to sustainable
growth in the long term, take up corporate resources which may affect corporate
short-term performance and jeopardize the interests of employees (Larcker
et al. 2022). ESOPs function as institutional arrangements that give employees
the opportunity to acquire or purchase shares for the purpose of compensating
employees for short-term benefits and motivating them to actively contribute to the
long-term success and value creation of the company, thereby aligning their interests
with those of the organization (Bova etal 2015b). The implementation of ESOPs
has enabled employees to become shareholders in the organization, which alleviates
the corporate agency problem by bundling interests. Employees can leverage their
informational strengths and exhibit an increased willingness to engage in corporate
governance decisions (He et al. 2024), such as mitigating executive misconduct
and reducing overall company risks (Bova et al. 2015a; Hochberg and Lindsey
2010; Huang et al. 2019). In summary, ESOPs can coordinate the development
goals of employees and the enterprise, inspire employees to take on more social
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responsibility and pay attention to environmental protection, and simultaneously
exert the governance effect of employees to cooperate with management to promote
sustainable development and enhance corporate ESG performance. Thus, it is
proposed that.
Hypothesis 1 ESOPs have a positive impact on corporate ESG performance.
2.3 The mediator oflong‑term orientation
Corporate long-term orientation refers to the tendency of enterprises to prioritize
and choose to have long-term impacts on decision-making and behavior after a
certain delay (Lumpkin and Brigham 2011), commonly in the form of branding
and R&D expenditures, which is related to the sustainable operation and long-term
development of enterprises (Block 2009; Flammer and Bansal 2017). Stakeholder-
agency theory argues that the interests of employees are not always consistent
with those of shareholders and managers (Hill and Jones 1992; Eisenhardt 1989),
especially when faced with sustainable investments that may affect the short-term
interests of employees (Kong etal. 2024). ESOPs, as medium to long-term incentive
compensation through granting company shares to employees, play the role of
“golden handcuffs” in balancing the interests of employees and the firm (Dasilas
2024), which helps to realize the joint formation of long-term orientation between
employees and the company and focuses on the long-term value of the company
(He etal. 2024; Hennig etal. 2023). For instance, based on the context of China’s
mixed ownership reform, Zhang et al. (2020) reveal that the implementation of
ESOPs influences firms’ R&D decisions. Specifically, firms implementing ESOPs
prefer long-term-oriented behavior and increase R&D investment. ESOPs transform
employees into shareholders and firmly combine employees’ interests with those of
the enterprise through system design provisions such as term lock and centralized
management, which help to maintain the stability of the employees in firm’s
activities (Core and Guay 2001), cultivate the employees’ sense of “ownership”
(Baker etal. 1988), thereby developing the long-term orientation and concern for
the long-term development of the organization (He etal. 2024).
The long-term investment orientation, as a strategic focus for enterprises, mitigates
short-sighted behavior and curbs the pursuit of short-term profits within enterprises
(Flammer and Bansal 2017; Oyer and Schaefer 2005). Long-term-oriented firms resist
managerial myopia and enhance firm value through pursuing long-term decisions such
as innovative R&D behaviors (Block 2009), and building relationships with stakehold-
ers (Flammer and Bansal 2017). These activities facilitate the sustainable long-term
development of enterprises (Cornell and Shapiro 2021). For instance, enterprises with
a long-term growth orientation are more willing to make socially responsible invest-
ments, such as taking on more social responsibility (Choi etal. 2023), which can help
increase corporate social value. Meanwhile, the long-term orientation of the enter-
prise also enables access to external resources (Le Breton-Miller and Miller 2009),
thus implementing green strategies and green innovation activities and reducing envi-
ronmental pollution (Saether et al. 2021). Flammer and Bansal (2017) also noted
Employee stock ownership plans andcorporate environmental,…
that corporate long-term orientation also serves corporate governance roles, such as
enhancing enterprise value and operational efficiency. In general, ESOPs facilitate the
formation of the long-term orientation of firms, as manifested in behaviors such as
conducting R&D investments, which consequently helps to improve corporate ESG
performance. Thus, it is proposed that.
Hypothesis 2a ESOPs are positively associated with corporate long-term
orientation.
Hypothesis 2b Corporate long-term orientation is positively associated with ESG
performance.
2.4 The mediator ofinternal control quality
The internal control system is defined as a series of formal institutional
arrangements implemented within an enterprise to improve operational efficiency,
fully and effectively acquire and utilize all kinds of resources, and achieve the
established management objectives under a specific environment (Wang et al.
2018). Stakeholder theory suggests that positive stakeholder involvement, such as
employee involvement in company development decisions, is instrumental to the
long-term success and sustainability of firms (Jones 1995; Parmar et al. 2010).
ESOPs, as the institutional arrangements that bind the interests of employees and
the enterprise, can stimulate employees’ motivation and initiative to participate in
corporate governance to alleviate the agency problems (He etal. 2024) and reduce
the overall risk of the enterprise (Huang etal. 2019). Guo etal. (2016) view that the
improvement of internal control is a systematic and long-term undertaking that relies
on employees as its foundation. The performance of employee functions is closely
linked to the rationality of internal control design and its operational effectiveness.
By providing incentives to employees, ESOPs effectively mitigate human resource
management risks, thereby fostering employees’ motivation to engage in the
design, supervision, and feedback of internal control systems (Balsam etal. 2014).
Furthermore, ESOPs enhance the sense of identification and affiliation among non-
executive employees towards the organization (Kruse and Blasi 1995), diminish
barriers to information exchange (Bova etal. 2015b; He etal. 2024), improve their
recognition and acceptance of the “top-level tone” of internal control, and promote
more effective and thorough implementation of internal control systems.
A well-designed and properly executed internal control system aids in enhancing
production management and mitigating internal information asymmetry concerns
(Bova et al. 2015b). On the one hand, an effective internal control system can
improve the risk management of an enterprise. Previous research (Wang etal. 2018)
has shown that an efficient internal control system can hedge against idiosyncratic
and systemic risks and mitigate the negative effects of systemic failures. That is,
an efficient internal control system can reduce the risk of corporate governance
activities and thus improve ESG performance (Lu et al. 2024). On the other
hand, the effective internal control system promotes standardized management of
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corporate social responsibility, develops decision-making mechanisms for corporate
social responsibility (Boulhaga etal. 2022), and avoids negative impacts brought by
enterprises when undertaking social responsibility, which is conducive to promote
the improvement of corporate ESG performance (Lu et al. 2024). In summary,
ESOPs facilitate the enhancement of the internal control quality, which in turn
promotes the enhancement of corporate ESG performance. Thus, it is proposed that.
Hypothesis 3a ESOPs are positively correlated with corporate internal control
quality.
Hypothesis 3b Corporate internal control quality is positively correlated with ESG
performance.
2.5 The moderator ofsupervisory board
Supervisory board, as an indispensable part of China’s current corporate governance
structure, refers to a legally mandatory and permanent body composed of
supervisors elected by the shareholders’ meeting and those democratically elected
by the company’s employees to supervise and inspect the company’s business
activities (Jia and Zhang 2013). Prior research has demonstrated that supervisory
boards serve a key role in monitoring the behavior of corporate directors and senior
management in carrying out their corporate duties (Nadeem 2020), and providing
valuable resources to the company (Faghfouri etal. 2015; Huang etal. 2020). For
example, Ran etal. (2015) indicate that the establishment of a supervisory board
can effectively oversee the behavior of directors and executives within the firm and
improve the quality of corporate disclosure.
This study argues that supervisory board weakens the positive relationship
between ESOPs and corporate ESG performance. ESOPs transform employees into
shareholders by bundling their interests, reinforcing their motivation and initiative,
and leveraging their informational strengths to participate in corporate governance,
such as mitigating executive misconduct and reducing overall company risks
(Bova etal. 2015a). When the supervisory board size is small and its supervisory
function is limited, the internal corporate governance environment deteriorates
(Huang etal. 2020). That is, the supervisory board cannot fully utilize the corporate
governance function. At this point, employees who become shareholders through
ESOPs are better able to take advantage of their initiative and make full use of the
information advantage to exert governance effects in the absence of supervisory
board governance (He etal. 2024), such as monitoring and restraining managers’
opportunistic behaviors (Huang etal. 2019), to strengthen the internal governance
of the firm and thus enhance ESG performance. Conversely, when the supervisory
board size is large and its supervisory function is fully utilized, the corporate internal
governance environment is more favorable and the need to improve the governance
environment through employee participation in corporate governance is no longer
necessary. Thus, it is proposed that.
Employee stock ownership plans andcorporate environmental,…
Hypothesis 4 Supervisory board negatively moderates the relationship between
ESOPs and corporate ESG performance. Specifically, the positive effect of ESOPs
on corporate ESG performance is stronger when the supervisory board size is small.
2.6 The moderator ofagency costs
Agency costs generally exist within corporations and are defined as the cost of
conflicts of interest between management and shareholders, which generally consist
of corporate expenditures that benefit management at the expense of shareholders,
as well as expenditures incurred due to the need to monitor management’s
behavior (Eisenhardt 1989; Hill and Jones 1992). Agency costs arise as a result
of a combination of divergent interests of shareholders and managers and severe
information asymmetry (Ang etal. 2000). Corporate governance has been widely
used to reduce firms’ agency costs, that is, the incentives to inhibit managers from
pursuing their own interests at the expense of shareholders are mitigated (Chen etal.
2012; Eisenhardt 1989).
ESOPs, as an important means of leveraging the value of corporate talent, rein-
force internal supervision, mutual communication, and collaboration among employ-
ees in business activities (Aldatmaz etal. 2018; Baker etal. 1988; Fang etal. 2015),
thereby enhancing their involvement in corporate governance (He etal. 2024). When
the corporate agency costs are high, the goal deviation between managers and share-
holders is relatively large and the existing internal governance mechanism makes it
difficult to reduce or correct this bias. Turning employees into corporate sharehold-
ers through ESOPs can give full play to employees’ initiative the information advan-
tage of being familiar with the company’s operation and management (Huang etal.
2019), supervise managers’ operation and management decisions and daily behav-
iors through corporate governance (He etal. 2024), remedy managers’ short-sighted
behaviors, and carry out activities to enhance the long-term value of the enterprise,
such as social donations, environmental protection, and governance supervision (He
etal. 2024; Kong etal. 2024; Zhou etal. 2022), so as to enhance corporate ESG
performance. In other words, ESOPs exert a more substantial impact on enhancing
corporate ESG performance in the presence of high agency costs compared to com-
panies with low agency costs. Thus, it is proposed that.
Hypothesis 5 Agency costs positively moderate the relationship between ESOPs
and corporate ESG performance. Specifically, the positive effect of ESOPs on cor-
porate ESG performance is stronger when agency costs are high.
2.7 The moderator ofmarket competition
Market competition, as an integral part of the external corporate governance
environment, refers to the degree of competition that an enterprise faces in its
industry, which monitors and constrains, to some extent, the actions, strategies, and
performance of the company (Utterback and Suárez 1993). In a highly competitive
marketplace, where competitive threats and pressure to make resource allocation
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decisions are increasing, companies must act quickly to respond to competitive
actions and strategies or be eliminated from the marketplace (Kilduff etal. 2016;
Zhou etal. 2017). For instance, Ang (2008) indicates that firms are less likely to
cooperate when there is a high level of competition in the market based on data from
manufacturing firms in Singapore.
The intensely competitive market environment has forced firms to focus on exter-
nal stakeholders such as peer competitors, suppliers, and customers, and to make pru-
dent resource allocations, concentrating resources that would otherwise be used for
long-term value enhancement on solving short-term survival problems and gaining
competitive advantage (Porter 1980). Although ESOPs can fully motivate employ-
ees, as internal stakeholders, to take the initiative to learn and actively participate in
corporate operation and management (Fang etal. 2015; He etal. 2024), the focus of
the organization is on scheduling resources to link financial activities with external
stakeholders such as competitors, suppliers, and customers, and ESOPs rarely func-
tion in linking with external industry stakeholders (Chen etal. 2020). As a result,
it is difficult for companies to allocate resources to non-financial activities such as
social donations, environmental protection, and internal governance that contribute
to long-term corporate value enhancement, even though these activities also facili-
tate the acquisition of competitive advantage to a certain extent (Kotzian 2023; Loku-
waduge and Heenetigala 2017). That is, a more stable competitive environment in
the industry is needed to utilize the governance effect of employees to contribute to
the sustainable business development of the company through the implementation of
ESOPs. Overall, ESOPs in a less competitive market have a more pronounced impact
on improving corporate ESG performance compared to companies operating in
highly competitive markets. Thus, it is proposed that.
Hypothesis 6 Market competition negatively moderates the relationship between
ESOPs and corporate ESG performance. Specifically, the positive effect of ESOPs
on corporate ESG performance is stronger when market competition is low.
2.8 The moderator oflegal environment
The legal environment is defined as the various legal factors that exert influence
on the business management activities of an enterprise, including the regulations,
decrees, and ordinances promulgated by the national or local governments (Edelman
and Suchman 1997). As an essential component of a firm’s external governance
environment, the legal environment, especially as structured by the enforcement
activities of regulatory agencies, can significantly affect the activities of an
organization (Short and Toffel 2010). For instance, Li and Filer (2007) indicate
that investors in countries with weak legal environments prefer direct investment to
indirect (portfolio) investment from a country perspective. Jiao etal. (2015), based
on the Chinese context, discover the role of the legal environment in facilitating
firms’ innovation.
The legal environment is a vital guarantee for the implementation of equity
incentives, and employee equity incentives compared to executive equity incentives
Employee stock ownership plans andcorporate environmental,…
tend to rely more on relatively complete legal conditions, due to the employees in
the enterprise management decision-making in a relatively weak position (He etal.
2024). In the ESOP regime development process, the favorable legal environment
safeguards the reasonableness of the employee equity incentive schemes, such as
standardized term locks, centralized management, and the design of the betting
agreement system, which effectively protects the interests of the employees (Kong
etal. 2024). In the implementation of ESOPs, the comprehensive legal environment
enables the effective implementation of ESOPs, transforms corporate employees
into shareholders to make decisions to realize that employees’ interests are firmly
bound to the interests of the enterprise, actively exerts employees’ initiative to par-
ticipate in corporate governance, supervises managers’ business decisions to keep in
line with the long-term development of the enterprise, and enhances the enterprise’s
environmental protection investment, social responsibility, and governance capac-
ity, thus improving the enterprise’s ESG performance (Fang etal. 2015; Kong etal.
2024; Zhou etal. 2022). On the contrary, in regions where the legal environment is
weak, the business development environment is poor, and corporate policies such
as ESOPs are hard to guarantee and realize (Short and Toffel 2010), thereby hav-
ing a more limited role in motivating and balancing the interests of employees. In
sum, ESOPs for firms in a good legal environment have a more significant effect
on improving ESG performance than those in a poor legal environment. Thus, it is
proposed that.
Hypothesis 7 Legal environment positively moderates the relationship between
ESOPs and corporate ESG performance. Specifically, the positive effect of ESOPs
on corporate ESG performance is stronger when the legal environment is favorable.
3 Method
3.1 Sample anddata
The primary sample comprises all listed companies on the Shanghai Stock Exchange
and the Shenzhen Stock Exchange from 2014 to 2021. This paper begins in 2014
to ensure the availability of data on ESOPs, as the China Securities Regulatory
Commission formally issued the Guidance on Pilot Implementation of Employee
Share Ownership Plans for Listed Companies in 2014, encouraging listed companies
to carry out ESOPs. In accordance with previous literature (Lin et al. 2021; Lu
etal. 2024), this study employs several standards to select the sample. First, firms
in the financial sector are removed; second, observations that are subject to special
treatment by stock exchanges (labeled ST/*ST) are dropped. Finally, observation
samples containing missing values are deleted. To alleviate the problem of outliers,
all continuous variables are winsorized at the upper and lower 1% level. After the
above procedure, the final sample is made up of 13,299 firm-year observations.
ESOPs data is manually collected from their company announcements. Data on
ESG performance is obtained from the Wind database. Firm internal control qual-
ity data is available from the Dibble database. Legal environment data is sourced
X.Zeng
from the China Provincial Marketization Index Report. Other financial and corpo-
rate governance data are derived from the China Securities Market and Accounting
Research (CSMAR) database.
3.2 Variables
3.2.1 The dependent variable
ESG Performance (ESG). ESG performance is measured by the Huazheng ESG
index, which has been employed by massive research on ESG issues in the Chinese
Market (e.g. Lin etal. 2021; Lu etal. 2024; Tian and Tian 2022). The Huazheng ESG
evaluation system consists of a three-level index, categorizing listed companies into
nine levels ranging from C to AAA based on their scores. This study assigns values
of 1–9 points sequentially to measure the ESG performance of listed companies.
The greater the score, the better the ESG performance of listed companies.
3.2.2 The independent variable
Employee Stock Ownership Plans (ESOPs). Consistent with previous studies
(Kong etal. 2024; Oehmichen etal. 2018), this paper employs a dummy variable
to measure ESOPs. By manually collecting announcements of employee stock
ownership plans from listed companies, ESOPs are coded as 1 if an employee stock
ownership plan has been implemented in the given year, and 0 otherwise.
3.2.3 The mediators
Long-term Orientation. The long-term orientation of a firm is generally challenging
to observe directly and is often reflected through the corporate long-term strategic
activities (Flammer and Bansal 2017), such as brand building, innovation,
craftsmanship, and deal-making (Block 2009; Miller and Le Breton-Miller 2006).
In particular, innovation investment, as a key form of long-term strategic investment,
has been broadly utilized to measure the long-term orientation of firms (Block 2009;
Flammer and Bansal 2017). Building upon the prior research, this study measures
the long-term orientation of firms by adopting the intensity of R&D investment,
which is calculated as the ratio of R&D investment to operating income. The larger
the value, the stronger the long-term orientation of the firm.
Internal Control Quality. Following previous literature (Ge et al. 2021; Lu
et al. 2024), this paper measures the quality of enterprise internal control using
the enterprise risk control evaluation index (EICQ). The larger the internal control
index, the better the firms’ internal control quality.
3.2.4 The moderators
The two moderators representing internal governance factors are supervisory board
(Supervisory board) and firm agency costs (Agency costs). Supervisory board
Employee stock ownership plans andcorporate environmental,…
is measured by the number of supervisory boards (Huang et al. 2020). A higher
Supervisory board value suggests that the firm has the larger size of the supervisory
board. Agency costs typically include managerial perks, such as managers’ income,
communication bills, entertainment expenses, and travel expenses (Eisenhardt
1989). Following prior studies (Ang etal. 2000; Obeng etal. 2021), Agency costs are
gauged through the ratio of the sum of selling expenses and administrative expenses
of an enterprise to its operating income. The larger the ratio, the higher the agency
costs of the firm.
The external governance environment factors are market competition (Market
competition) and legal environment (Legal environment). This study measures
Market competition by the Herfindahl index, which equals the sum of the squared
share of each company’s sales to total sales in the same industry. The higher the
index, the less competitive the industry is. The legal environment is measured
through the subdimension of market institutions’ development and legal protection
of the China Provincial Marketization Index to measure legal environment (i.e.
Xu etal. 2019; Zhou etal. 2017). It consists of three items: a) the development of
markets and legal intermediaries, i.e. the proportion of lawyers and independent
accountants in the local population; b) the legal environment for businesses; and c)
the legal protection of intellectual property rights. The higher the score, the more
developed the local legal environment.
3.2.5 Control variables
This study includes a comprehensive set of control variables at firm level in line
with prior research (Kong etal. 2024; Li etal. 2023; Lu etal. 2024): (1) firm size
(Firm size), calculated as the natural logarithm of corporate total assets; (2) firm
age (Firm age), calculated as the natural logarithm of the current year minus the
year of listing plus 1; (3) asset liability ratio (Leverage), measured by the ratio of
total liabilities to total assets; (4) return on assets (ROA), measured by the ratio of
net profit to total assets; (5) short-term liquidity (Cash), defined as the ratio of cash
and cash equivalents to total assets; (6) growth opportunity (Growth), defined as the
operating income for the year divided by operating income for the previous year
minus 1; (7) ownership concentration (Top10), which is measured by the ratio of
the number of shares held by the top ten shareholders to the total number of shares;
(8) board size (Board size), calculated as the natural logarithm of the number of
directors; (9) board Independence (Board Independence), which is defined as the
ratio of the number of independent directors to the number of board members; (10)
chairman-CEO duality (Duality), which is a dummy variable indicating whether the
chairman and general manager are the same person. The definitions of all variables
are displayed in Table1.
3.3 Model specification
This study constructs the following model (1) to examine the relationship between
ESOPs and corporate ESG performance.
X.Zeng
To test the mediating effects of long-term orientation and internal control
quality, Models (2), (3), and (4) are constructed.
Moreover, model (5) is developed to test the moderating effect of governance
environment based on model (1).
(1)
ESG
i,t=𝛼0+𝛼1ESOPsi,t+𝛼iControlsi,t+
∑
Industry +
∑
Year +𝜀i,
t
(2)
Mediator
i,t=𝜆0+𝜆1ESOPsi,t+𝜆iControlsi,t+
∑
Industry +
∑
Year +𝜀i,t
(3)
ESGi
,
t
=𝛿0+𝛿1Mediator
i
,
t
+𝛿
i
Controls
i
,
t
+
∑
Industry +
∑
Year +𝜀
i
,
t
(4)
ESGi,t=𝛾0+𝛾1Mediatori,t+𝛾2ESOPsi,t+𝛾iControlsi,t+∑Industry +∑Year +𝜀i,t
Table 1 Variables and explanations
Variables Definitions
ESG ESG rating score of the Huazheng index for the current year
ESOPs The ESOP implemented by the company in the current year is coded as 1,
otherwise 0
LTO R&D investment as a percentage of operating revenue
ICQ Natural logarithm of the enterprise risk control assessment index
Supervisory board Number of supervisory boards
Agency costs The ratio of the sum of selling expenses and administrative expenses of an
enterprise to its operating income
Market competition The sum of the squared share of each company’s sales to total sales in the same
industry
Legal environment The indicators of “intermediary organization development and legal score” in the
“China provincial marketization index report”
Firm size Natural logarithm of corporate total assets
Firm age Natural logarithm of the current year minus the year of listing plus 1
Leverage The ratio of total liabilities to total assets
ROA The ratio of net profit to total assets
Cash The ratio of cash and cash equivalents to total assets
Growth Operating income for the year divided by operating income for the previous year
minus 1
Top10 The ratio of the number of shares held by the top ten shareholders to the total
number of shares
Board size Natural logarithm of the number of directors
Board independence The ratio of the number of independent directors to the number of board members
Duality The chairman and general manager take 1 if they are the same person, otherwise 0
Employee stock ownership plans andcorporate environmental,…
where ESGi,t refers to ESG performance measures of firm i in year t. The key
explanatory variable is ESOPs, measured at the end of year t. Mediatori,t includes
long-term orientation and internal control quality of firm i in year t. Moderatori,t
consists of supervisory board size and agency costs, market competition, and legal
environment of firm i in year t. Controls represent the set of control variables defined
above. The standard errors of the estimated coefficients are allowed for clustering of
observations by both firm and year.
4 Empirical results
4.1 Descriptive statistics
Table2 reports the results of descriptive statistics of key variables. The average ESG
is 6.335, indicating that the listed companies have an average ESG score between
BBB and A. The standard deviation of ESG is 1.202, showing significant differ-
ences in ESG performance among listed companies. The mean of ESOPs is 0.05,
with a median of 0, indicating that ESOPs are relatively uncommon among listed
(5)
ESG
i,t=
𝛽
0+
𝛽
1
ESOPs
i,t+
𝛽
2
ESOPs
i,t×
Moderator
i,t+
𝛽
3
Moderator
i,
t
+𝛽iControlsi,t+
∑
Industry +
∑
Year +𝜀i,t
Table 2 Descriptive statistics
Variables Obs Mean SD Min Median Max
ESG 13,299 6.335 1.202 3.000 6.000 9.000
ESOPs 13,299 0.050 0.218 0.000 0.000 1.000
LTO 13,299 2.364 2.029 0.116 1.999 10.909
ICQ 8,941 6.082 1.524 0.000 6.487 6.848
Supervisory board 13,299 2.493 1.653 0.000 3.000 12.000
Agency costs 13,299 0.175 0.501 0.000 0.115 18.348
Market competition 13,299 0.142 0.126 0.039 0.100 1.000
Legal environment 13,299 12.760 2.620 2.496 13.434 16.507
Firm size 13,299 22.245 1.266 20.047 22.046 26.280
Firm age 13,299 2.206 0.772 0.693 2.303 3.367
Leverage 13,299 0.413 0.201 0.058 0.403 0.965
ROA 13,299 0.031 0.089 − 0.414 0.039 0.213
Cash 13,299 15.495 11.755 0.646 12.403 61.222
Growth 13,299 0.166 0.406 − 0.643 0.112 3.078
Top10 13,299 0.394 0.181 0.129 0.357 0.899
Board size 13,299 2.289 0.218 1.792 2.302 2.890
Board independence 13,299 0.380 0.065 0.250 0.360 0.600
Duality 13,299 0.339 0.473 0.000 0.000 1.000
X.Zeng
companies. The variance inflation factor (VIF) is calculated in this study and the
average VIF is less than 2, which suggests that multicollinearity is not an issue.
4.2 ESOPs andcorporate ESG performance
Table3 presents the results of the panel data regressions of ESOPs on corporate
ESG performance. In column (1), the current study first includes ESOPs as the
only explanatory variable. The coefficient of ESOPs is 0.128, significant at the 1%
level. Column (2) incorporates all the control variables from model (1) and the
coefficient of ESOP varies to 0.083 at the 5% level. This indicates that ESG perfor-
mance of firms with ESOPs is 8.3% higher than that of firms without ESOPs. These
results support Hypothesis 1 that ESOPs are positively associated with firm ESG
performance.
The coefficients on control variables are largely consistent with those reported in
prior studies (i.e. Lu etal. 2024; Wang etal. 2023). For example, firms with higher
profitability, lower leverage, and larger scales exhibit better ESG performance.
Board size is positively associated with corporate ESG performance (e.g., Li etal.
2023). Additionally, CEO duality is negatively associated with corporate ESG per-
formance, aligning with previous studies that have explored how CEO duality tends
to prioritize managers over stakeholders (i.e. Husted and de Sousa-Filho 2022).
4.3 Addressing endogeneity
While this study employs a panel data regression model in the main regres-
sions to eliminate concerns about omitted firm characteristics and common time
Table 3 The association
between ESOPs and ESG
performance
(1) t statistics in parentheses; (2) * p < 0.1, ** p < 0.05, *** p < 0.01
(1) ESG (2) ESG
ESOPs 0.128*** (3.82) 0.083** (2.52)
Firm size 0.384*** (38.11)
Firm age 0.428*** (32.83)
Leverage − 0.823*** (− 12.28)
ROA − 0.120*** (− 6.55)
Cash 0.008*** (9.63)
Growth − 1.043*** (− 14.59)
Top10 0.585*** (10.54)
Board size 0.219** (2.12)
Board independence 0.095 (0.65)
Duality 0.003*** (3.78)
Constant 5.728*** (24.32) − 3.193*** (− 9.62)
Industry/year YES YES
N 13,299 13,299
R-squared 0.122 0.248
Employee stock ownership plans andcorporate environmental,…
trends, the issue of reverse causation and certain omitted variables may still inter-
fere with the results. Companies with better ESG performance are more likely to
enhance the interests of their stakeholders by “doing good by doing well” (Cornell
and Damodaran 2020; Larcker etal. 2022). For instance, both the “Social (S)” and
“Governance (G)” factors of ESG stress the need to build trust and loyalty with
stakeholders such as employees to optimize corporate governance (Cabaleiro-Cer-
viño and Mendi 2024). ESOPs, as a strategic decision that promotes employees to
develop long-term orientation and participation in corporate governance, are usually
determined endogenously by the firm (Chen etal. 2020). Thus, companies with bet-
ter ESG performance, especially those with higher scores on the social and govern-
ance dimensions, are more likely to implement ESOPs. To mitigate the endogeneity
problem due to reverse causality, this study adopts both a lagged explanatory vari-
able approach and a propensity score matching method.
4.3.1 Lagged explanatory variable
A lagged one-period treatment is applied to ESOPs to temporally distinguish ESOPs
from corporate ESG performance. Specifically, ESOPs from the previous period are
used in a regression analysis with corporate ESG performance in the current period.
The results of this analysis are reported in model (1) of Table4. The coefficient
of ESOPs is positive and significant, which is consistent with the baseline results in
Table3. Specifically, the coefficient of ESOPs is 0.150 with ESG performance as
the dependent variable, which is higher than the value of 0.083 in Table3.
4.3.2 Propensity score matching method
To address the potential endogeneity problems further, the current study employs
the propensity score matching method to alleviate this problem. Following Rosen-
baum and Rubin (1983), this study selects return on assets (ROA), asset liability
ratio (Leverage), growth opportunity (Growth), chairman-CEO duality (Duality),
board size (Board size), and enterprise size (Firm size) as covariates, and matches
Table 4 Results of the
endogeneity test
(1) Column (1) exhibits the regression results after lagging the
ESOPs by one period and column (2) shows the results using the
propensity score matching method; (2) t statistics in parentheses; (3)
* p < 0.1, ** p < 0.05, *** p < 0.01
(1) ESG (2) ESG
ESOPs 0.114* (1.81)
L.ESOPs 0.150*** (2.79)
Controls YES YES
Constant − 3.464*** (− 9.50) − 3.934*** (− 4.44)
Industry/year YES YES
N 9174 1282
R-squared 0.285 0.308
X.Zeng
the samples of companies implementing ESOPs and companies not implementing
ESOPs using the nearest neighbor matching method. The selected covariates did
not exhibit significant differences in the T-test results after matching, indicating the
absence of substantial differences between the treatment group and the control group
in the matched sample, as confirmed by testing the PSM parallel trend. Furthermore,
the matching quality of the density function map before and after matching is satis-
factory, satisfying the common support hypothesis. The result is shown in model (2)
of Table4. The coefficient of ESOPs on their ESG performance is still significant
at a 10% level, indicating that the result after eliminating the endogeneity problem
through the PSM method is still robust.
4.4 The mediating effects
In this session, the current study explores two potential mechanisms through which
ESOPs positively affect corporate ESG: long-term orientation and internal control
quality.
One mechanism discussed in the theoretical framework section is “long-term ori-
entation”. This study expects that ESOPs are more likely to facilitate the formation
of long-term orientation of firms and thereby improve their ESG performance. A
three-step approach is employed to test the mediating effect of long-term orientation.
Table5 demonstrates the results of the mediating effect of long-term orientation. As
is shown in Column 1, the coefficient of ESOPs is 0.227, which is significantly posi-
tive at a 1% level, indicating that ESOPs are positively associated with long-term ori-
entation. Hypothesis 2a is supported. In Column 2, the coefficient of long-term ori-
entation on ESG performance is 0.045, which is significantly positive at the 1% level,
indicating that long-term orientation is positively associated with ESG performance.
Hypothesis 2b is supported. The regression results in column (3) display that after
adding the long-term orientation, the effect of ESOPs on ESG performance is still
significantly positive at the 1% level, which supports Hypothesis 2.
In addition, this study performed the Sobel test (Sobel 1982) and Bootstrap
method (Shrout and Bolger 2002) to examine the mediating effects of long-term
Table 5 Mediating effect of long-term orientation
(1) t statistics in parentheses; (2) * p < 0.1, ** p < 0.05, *** p < 0.01
(1) LTO (2) ESG (3) ESG
ESOPs 0.227*** (2.87) 0.110*** (2.48)
LTO 0.045*** (8.62) 0.044*** (8.55)
Controls YES YES YES
Constant 1.444 (0.99) − 3.277*** (− 8.76) − 3.257*** (− 8.95)
Industry/year YES YES YES
N 13,299 13,299 13,299
R-squared 0.335 0.275 0.275
Sobel test Mediating effect = 0.010, Z = 3.43, p < .01
Bootstrap test Mediating effect = 0.010, Z = 3.38, p < .01
Employee stock ownership plans andcorporate environmental,…
orientation. The results of the Sobel test show a significant mediation effect of long-
term orientation (z = 3.43, p < 0.01). As is shown in the bootstrap test, the boot-
strapped indirect effect of long-term orientation is significant (b = 0.010, z = 3.38,
p < 0.01) with a 95% confidence interval excluding zero (0.004–0.015). In general,
the mediating effects of long-term orientation are confirmed, such that ESOPs facili-
tate the formation of long-term corporate orientation, which in turn enhances corpo-
rate ESG performance.
Another mechanism discussed in the theoretical framework section is “internal
control quality”. This study expects ESOPs promote employee participation in
corporate governance to enhance internal control quality, which in turn improves
corporate ESG performance. A three-step approach is used to examine the
mediating effect of internal control quality. As is shown in Column 1 of Table6,
the coefficient of ESOPs is 0.183, which is significantly positive at a 1% level,
indicating that ESOPs are positively related to internal control quality. Hypothesis
3a is supported. In Column 2 of Table6, the coefficient of internal control quality on
ESG performance is 0.148, which is significantly positive at the 1% level, indicating
that internal control quality is positively related to ESG performance. Hypothesis 3b
is supported. The regression results in column (3) of Table6 display that the effect
of ESOPs on ESG performance is still significantly positive at a 5% level, and the
partial mediation effect is present, which supports Hypothesis 3.
Moreover, the results of the Sobel test show a significant mediation effect of
internal control quality (z = 2.49, p < 0.05), and the bootstrapped indirect effect
of internal control quality is significant (b = 0.026, z = 4.29, p < 0.01) with a 95%
confidence interval excluding zero (0.013–0.038). Overall, the mediating effect of
internal control quality is supported. That is, ESOPs promote the improvement of
internal control quality, which enhances corporate ESG performance.
4.5 The moderating effects
In this subsection, the current study explores the effect of the governance envi-
ronment on the relationship between ESOPs and corporate ESG performance.
Table 6 Mediating effect of internal control quality
(1) t statistics in parentheses; (2) * p < 0.1, ** p < 0.05, *** p < 0.01
(1) ICQ (2) ESG (3) ESG
ESOPs 0.183*** (5.18) 0.087** (1.97)
ICQ 0.148*** (18.09) 0.148*** (18.03)
Controls YES YES YES
Constant 0.348 (0.24) − 3.603*** (− 11.54) − 3.587*** (− 11.59)
Industry/year YES YES YES
N 8941 8941 8941
R-squared 0.178 0.304 0.305
Sobel test Mediating effect = 0.026, Z = 2.49, p < .05
Bootstrap test Mediating effect = 0.026, Z = 4.29, p < .01
X.Zeng
Particularly, this study tests the moderating effects of internal governance envi-
ronments (i.e. supervisory board and agency costs) and external governance envi-
ronments (i.e. market competition and legal environment).
The current study first explores how supervisory board might affect the
association between ESOPs and corporate ESG performance. Column (1) of
Table 7 depicts the results of the moderating effect of supervisory board. It is
found that the coefficient of ESOPs × Supervisory board is significantly negative
(−0.055, t = −2.12), suggesting the positive effect of ESOPs diminishes when
corporate supervisory board size is large. Hypothesis 4 is supported.
This research next examines how agency costs affect the relationship between
ESOPs and corporate ESG performance. The results are shown in column (2) of
Table7. The coefficient on ESOPs × Agency costs is positive and statistically sig-
nificant at the 1% level (0.117, t = 3.613), indicating that ESOPs are more help-
ful for improving corporate ESG performance with high agency costs. Overall,
Table 7 The moderating effects
(1) t statistics in parentheses; (2) * p < 0.1, ** p < 0.05, *** p < 0.01
(1) ESG (2) ESG (3) ESG (4) ESG
ESOPs 0.225*** 0.052 0.146*** − 0.325**
(2.95) (1.54) (2.97) (− 1.96)
Supervisory board − 0.025***
(− 3.02)
ESOPs × supervisory board − 0.055**
(− 2.12)
Agency costs − 0.046
(− 1.47)
ESOPs × agency costs 0.117***
(3.13)
Market competition − 0.216
(− 0.97)
ESOPs × market competition − 0.460*
(− 1.71)
Legal environment − 0.014***
(− 4.44)
ESOPs × legal environment 0.031**
(2.53)
Controls YES YES YES YES
Constant − 3.338*** − 3.136*** − 3.122*** − 3.086***
(− 9.50) (− 9.00) (− 8.87) (− 8.85)
Industry/year YES YES YES YES
N 13,299 13,299 13,299 13,299
R2 0.249 0.249 0.248 0.247
Employee stock ownership plans andcorporate environmental,…
agency costs enhance the impact of ESOPs on corporate ESG performance, con-
sistent with Hypothesis 5.
The present study then investigates how market competition moderates the
relationship between ESOPs and corporate ESG performance. The results of
the moderating effect of market competition are demonstrated in Column (3) of
Table7. The coefficient on ESOPs × Market competition is significantly negative.
The results suggest that the positive relationship between ESOPs and corporate
ESG performance is more pronounced in low competitive market environments.
Hypothesis 6 is supported.
Finally, this paper analyzes the moderating effect of the legal environment on
the relationship between ESOPs and corporate ESG performance. The results are
reported in column 4 of Table7. It is found that the coefficient of ESOPs × Legal
environment is significantly positive (0.031, t = 2.53), suggesting that ESOPs
have a greater effect on improving ESG performance in a favourable legal
environment. Generally, this study uncovers that the legal environment positively
moderates the relationship between ESOPs and corporate ESG performance,
which is consistent with Hypothesis 7.
4.6 Robust checks
4.6.1 Alternative explained variable
Due to the different standards for ESG ratings of listed companies by relevant
institutions such as Bloomberg, and FTSE Russell, different rating standards may
have impacts on results. Following Lu etal. (2024), this study uses Bloomberg’s
ESG score for the robustness test. The result is shown in model (1) of Table 8.
The coefficient of ESOPs on their ESG performance is still significant at the 1%
level.
4.6.2 Alternative explanatory variable
Considering that certain companies implemented multiple ESOPs over the
sample period, with variations in employee participation and the scale of ESOP
implementation across different periods, this study replaces the dummy variable
for ESOPs with the proportion of ESOPs to total equity in the current year for a
robustness test. The specific result is shown in model (2) of Table8. The coefficient
of ESOPs on their ESG performance is still significant at a 1% level, which is quite
similar to those reported in Table3.
4.6.3 Alternative research model
Given that the explanatory variables are ordinal variables ranging from 1 to 9, this
study also performs a substitution analysis on the initially specified regression model
using the ordered logit model. The specific result is shown in model (3) of Table8.
X.Zeng
The coefficient of ESOPs on their ESG performance is still significant at the 1%
level, which keeps up with the aforementioned findings.
5 Discussion
This study examines the association between ESOPs and corporate ESG
performance as well as the underlying mechanisms using a sample of Chinese
A-share listed companies spanning from 2014 to 2021. The findings reveal that
ESOPs have a positive impact on corporate ESG performance, primarily through
fostering long-term orientation and enhancing internal control quality. Moreover, the
promotional effect of ESOPs on corporate ESG performance is more significant in
firms characterized by small supervisory board size, high agency costs, low market
competition intensity, and favorable legal environment.
5.1 Theoretical implications
This study makes three contributions to the literature. Firstly, the current research
enriches the literature on employee compensation and corporate sustainability.
Scholars (i.e. Edman et al. 2023; Jain et al. 2023) have mainly focused on the
impact of compensation of top executives on firms’ activities. Compared to studies
on managerial incentives, this study looks more at equity incentives for corporate
employees. Extant studies have explored the consequences of ESOPs, such as
internal financing (Core and Guay 2001), firm performance (Hochberg and Lindsey
2010), and corporate governance (Aldatmaz etal. 2018; Blasi etal. 2016), but they
have mainly addressed the U.S. research context and the findings are inconsistent.
For example, Kim and Ouimet (2014) suggest that ESOPs can also engage in
“free-rider” behavior that results in a limited role for ESOPs in improving firm
performance. As such, Hennig etal. (2023) further investigate the inhibitory effect
Table 8 Robustness tests
(1) Column (1) shows the results with Bloomberg’s ESG scores replacing the dependent variable,
column (2) displays the results of the regression using the employee ownership percentage as the
independent variable, and column (3) reports the results of the analyses using the ordered logit model;
(2) t statistics in parentheses; (3) * p < 0.1, ** p < 0.05, *** p < 0.01
(1) ESG_blm (2) ESG (3) ESG
ESOPs 0.101*** (8.23) 0.222*** (2.89)
ESOPs_rate 0.077*** (3.21)
Controls YES YES YES
Constant 0.940*** (16.32) − 3.265*** (− 10.00) –
Industry/year YES YES YES
N 7452 13,299 13,299
R-squared 0.249 0.270 0.106
Employee stock ownership plans andcorporate environmental,…
of ESOPs on the turnover of general employees at the individual level based on
cross-country data. China’s uniqueness in terms of concentrated shareholdings and
corporate governance mechanisms has also drawn extensive scholarly attention to
the economic consequences of ESOPs for Chinese firms (Chang etal. 2015; Fang
et al. 2015; He et al. 2024). In particular, Dasilas (2024) explores the inverted
U-shaped relationship between ESOPs and firm performance based on the context
of significant state-owned equity in China. However, these studies have not paid
enough attention to corporate sustainability practices that enable businesses to
successfully cope with risks, crises, and uncertainties in their environment (Florez-
Jimenez etal. 2024). While some studies have concerned the impact of ESOPs on
CSR and environmental engagement (Kong etal. 2024; Zhou etal. 2022), it is still
unknown whether ESOPs affect corporate ESG performance. To fill this gap, this
study explores the impact of ESOPs on corporate ESG performance based on the
research context in China and reveals that ESOPs help to improve corporate ESG
performance. The findings enrich the external economic consequences of ESOPs
by providing Chinese evidence, and effectively integrate the research on employee
compensation and corporate sustainability.
Secondly, this study adds to the research on stakeholder engagement in global
ESG practices by uncovering the role of ESOPs in motivating employees to promote
corporate ESG performance. ESG practices have been widely recognized by corporate
stakeholders for their benefits in guiding corporate sustainability, increasing corporate
value, and reducing corporate risk (Galletta and Mazzù, 2023; Kotzian 2023;
Larcker etal. 2022). Stakeholders, as direct or indirect participants in corporate ESG
behaviors, influence corporate ESG performance through their activities (Parmar
etal. 2010). Existing studies mainly concern the effects of shareholders (Barko etal.
2022), directors (Husted and de Sousa Filho 2022; Nekhili etal. 2021), and executives
(Aabo and Giorici 2023) on global corporate ESG practices. Yet, the literature on the
impact of employees on corporate ESG performance is scarce. Stakeholder theory
views employees, as vital stakeholders of the firm, have specific interests related to
the development and operational performance of the firm (Freeman 1984), and have
more information advantage over other stakeholders in the management of the firm’s
business (Huang et al. 2019). However, as the relationship between employees and
firms is primarily a labor-contractual one, employees do not directly benefit from
the development of the firm’s business and they are not always actively involved in
its development and management (Wilhelm et al. 2024; Zhou et al. 2022). ESOPs
are institutional arrangements that share ownership of the firm and rights to future
earnings with employees. Prior studies (Aldatmaz et al. 2018; Baker et al. 1988;
Fang et al. 2015) suggest that ESOPs foster a sense of engagement and belonging
among employees, increase their work ethic and initiative, incentivize them to learn
independently and work in teams and balance the conflict of interest between the
employees and the firm, which helps to make the resolution of this conflict possible.
In China, an emerging market, ESOPs are effective in leveraging incentive advantages
and governance advantages in the context of large shareholders’ one-share dominance,
unsound corporate governance, and the imperfect external governance environment
(He etal. 2024; Jia and Zhang 2013). This study examines the impact of ESOPs on
corporate ESG performance in the Chinese context, further analyzes the moderating
X.Zeng
effects of China’s unique corporate governance structure (e.g., supervisory board size
and agency costs) and external governance environment (e.g., legal environment and
market competition), and emphasizes the critical role of employees, a key stakeholder,
in promoting corporate sustainable development under the unique context of China.
Overall, this study emphasizes the key role of employees, a key stakeholder, in
promoting sustainable corporate development in the context of China’s concentrated
shareholding and imperfect internal governance, and expands the research on
stakeholder participation in global ESG practices.
Thirdly, this work expands stakeholder theory and stakeholder-agency theory
by uncovering the mechanisms through which ESOPs affect corporate ESG perfor-
mance. Stakeholder theory and stakeholder-agent theory have been used to explain
the economic consequences of ESOPs (Chang etal. 2015; Fang etal. 2015; Hoch-
berg and Lindsey 2010; Oyer and Schaefer 2005). For instance, Zhou etal. (2022)
integrate stakeholder theory and stakeholder-agency theory to explore the external
economic incentives and internal psychological incentives as well as the moderat-
ing effects of firm size and governance structure of ESOPs on CSRs. Kong etal.
(2024) also examine the impact of ESOPs on corporate environmental engagement
and the moderating effects of the labor market, media coverage, and high-pollution
industries from the perspectives of stakeholder theory and agency theory. Yet, these
studies have inadequately addressed the mechanisms underlying the consequences of
ESOPs. This study proposes two mechanisms of action by which ESOPs affect cor-
porate ESG performance: corporate long-term orientation and internal control qual-
ity. ESOPs can balance the conflict of interest between employees and the firm by
providing employees with equity and transforming them into shareholders, forming a
long-term orientation of the firm through interest bonding, thus enhancing corporate
ESG performance (He etal. 2024; Hennig etal. 2023; Kong etal. 2024). Moreover,
ESOPs can give full play to the initiative of employees and promote employee par-
ticipation in corporate governance, thus enhancing corporate internal control qual-
ity, and thereby improving corporate ESG performance (Bova etal. 2015b; Hochberg
and Lindsey 2010; Huang etal. 2019; Parmar etal. 2010). The current work com-
bines the perspectives of stakeholder theory and stakeholder-agency theory to con-
struct a theoretical model of the impact of ESOPs on corporate ESG performance,
and further examines the mediating effect of internal control quality and long-term
orientation, as well as the moderating effect of China’s unique internal and external
corporate governance environments (e.g., supervisory board and agency costs in the
internal governance environment, the market competition and the legal environment
in the external governance environment), effectively integrating the perspectives of
stakeholder theory and stakeholder-agency theory in order to present a more compre-
hensive picture of the impact of ESOPs on corporate ESG performance.
5.2 Practical implications
The research findings provide valuable insights for various stakeholders, including
business managers, employees, policymakers, and industry associations. Business
managers should fully recognize the function of ESOPs in motivating employees’
Employee stock ownership plans andcorporate environmental,…
subjective initiative, participating in corporate governance and balancing the conflict
of interests between employees and the enterprise, and exerting the core advantages
of ESOPs in solving the stakeholder-agency problems and coordinating interests,
which not only helps to improve the firm’s financial performance (Fang etal. 2015)
but also enhances ESG performance and promote the corporate sustainable develop-
ment. Specifically, corporate managers can personalize the design of ESOPs by tak-
ing into account the actual business operation of the enterprise, considering factors
such as stock price, size, lock-up period, and source of funds, and carefully evalu-
ating the extent and effectiveness of the incentives, in order to better leverage the
role of ESOPs in enhancing corporate ESG performance and achieving sustainable
development.
Employees, as essential stakeholders in corporate activities, should take
their own initiative to strive for a stable return on equity by involving ESOPs,
in addition to obtaining fixed labor compensation. Since the return on employ-
ees’ equity is closely related to corporate long-term development, the employees
should actively utilize their independent learning ability, use their own infor-
mation advantage to participate in corporate governance, and provide valu-
able opinions and suggestions for business management. Moreover, employees
should also have a long-term outlook, pay more attention to the long-term inter-
ests of the enterprise and the rich return on equity brought about by the firm’s
development, and actively participate in corporate ESG investments as well as
sustainable development.
For policymakers, they should provide a favorable environment for enterprises
in terms of ESOPs rule-making and ESG practices. Specifically, policymakers
should continuously improve laws and regulations to encourage firms to adopt
ESOPs according to their own conditions, fully utilize the advantages of ESOPs
in improving the internal governance environment and balancing conflicts
of interest, and provide legislative safeguards for corporate ESG practices. In
addition, this study suggests that the impact of ESOPs on improving corporate
ESG performance is more significant in regions with better legal environments.
Policymakers should also provide a better external governance environment for
the implementation of ESOPs in order to better utilize the vital role of ESOPs
in enhancing corporate ESG performance and promoting corporate sustainable
development.
Industry associations, as institutional intermediaries linking the government
and enterprises, are of significance in promoting corporate innovation and sus-
tainable development (Yao et al. 2022). They should serve as bridges between
the government and enterprises, and collect information about enterprises in the
process of ESOPs and ESG practices to provide empirical references for policy-
makers to formulate appropriate and reasonable legal policies for the implemen-
tation of ESOPs and ESG practices. Meanwhile, this study also indicates that
the promotion effect of ESOPs on corporate ESG performance is more signifi-
cant when the industry competition is weaker. Industry associations should opti-
mize the competitive market environment to better utilize the incentive effect
of ESOPs and balance the conflict of interest to achieve corporate sustainable
development.
X.Zeng
5.3 Limitations andfuture directions
Undoubtedly, this study has some limitations. First, this study integrates
perspectives from stakeholder theory and stakeholder-agency theory to analyze
the relationship between ESOPs and corporate ESG performance. Future research
can take China’s Guidance on the Pilot Implementation of Employee Share
Ownership Plans for Listed Companies in 2014 as an external shock and explore the
consequences of the policy from the perspective of institutional theory. Second, this
paper investigates the impact of ESOPs on corporate ESG performance using the
Huazheng ESG index, a widely utilized measure among scholars concerning ESG
matters in the Chinese market (e. g. Lin etal. 2021; Lu etal. 2024; Tian and Tian
2022). Additionally, the Bloomberg ESG index is employed for a robustness test to
ensure that the findings align with the initial hypothesis. Nevertheless, a consensus
on the current ESG rating standards is lacking between the theoretical and practical
communities. Future research can further test the economic consequences of ESOPs
using relatively unified ESG rating data. Third, in terms of reverse causality between
ESOPs and ESG performance, this study explores the sources of endogeneity
problems and adopts approaches such as the propensity score matching method and
a lagged independent variable approach to mitigate endogeneity problems. Future
research could further refine the methodological limitations by adopting methods
such as natural experiments. Fourth, the sample is mainly from listed companies
in China, which affects the replicability of the findings in other contexts. Factors
such as economic systems and institutional and cultural environments may affect
the relationship and mechanisms between ESOPs and corporate ESG performance
(Kong et al. 2024). Future research could consider the relationship between the
two under institutional and cultural differences. Finally, this study concerns the
role of employees in promoting corporate ESG performance through ESOPs.
Future research could further explore how non-executive teams advance corporate
sustainability.
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