The Impact of ESG Ratings on Corporate Innovation: Evidence from Listed Companies

This paper contributes to the growing literature that explores the role of corporate governance and corporate social responsibility in influencing a company's innovation activities (O'Connor and Rafferty, 2012; Cook et al., 2019) by studying the causal impact of ESG ratings on innovation activities of listed companies. Specifically, we find that ESG ratings have a positive causal effect on a company's innovation activities, providing a new research perspective of ESG rating for the existing literature. 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 finds that the incentive effect of ESG ratings is not limited to green innovation, but also promotes overall innovation, joint patent applications, and high-quality patents. Finally, our channel analysis suggests that ESG ratings promote innovation by reducing a company's financing constraints, agency costs, likelihood of CEO turnover, and stock liquidity, as well as increasing a company's R&D ratio and R&D personnel, providing more empirical evidence for related 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).