The Causal Impact of ESG Ratings on Firm Innovation: Evidence from Joint Patent Applications and High-Quality Patents

This paper contributes to the growing literature that explores the role of corporate governance and corporate social responsibility in influencing innovation activities of listed firms by examining the causal impact of ESG ratings on innovation. Specifically, we find that ESG ratings have a positive causal effect on firm innovation, providing a novel research perspective on ESG rating to the existing literature (O'Connor and Rafferty, 2012; Cook et al., 2019). While existing studies on the impact of ESG ratings on innovation have focused on green innovation (Tan and Zhu, 2022; Wang et al., 2023), our study reveals that the incentive effect of ESG rating extends beyond green innovation and also promotes overall innovation, joint patent applications, and high-quality patents. Furthermore, our channel analysis shows that ESG rating promotes firm innovation by reducing financing constraints, agency costs, likelihood of CEO turnover, and stock liquidity, as well as enhancing the R&D ratio and R&D personnel of the firm, providing more empirical evidence to complement previous studies (Hall, 2002; Hall and Lerner, 2009; Bereskin and Hsu, 2011; Bereskin and Hsu, 2014; Fang et al., 2014; Howell, 2016; Yuan et al., 2023).