Can ESG ratings influence relationship-based transactions: Empirical evidence from Chinese listed companies

Abstract

This study examines the impact of environmental, social, and governance (ESG) ratings on relationship-based transactions, using data from Chinese listed companies from 2009 to 2021 as the research sample. A two-way fixed effects model is employed to investigate the mechanisms and economic consequences of ESG ratings on relationship-based transactions.The results reveal that higher ESG ratings significantly reduce the frequency of relationship-based transactions by improving the quality of accounting information and alleviating financing constraints. The conclusions remain unchanged after robustness tests and endogeneity analyses, including the instrumental variable approach, alternative measures of key variables and the exclusion of special years. Furthermore, external analysts'attention enhances the inhibitory effect of ESG ratings on relationship-based transactions, and internal independent director governance partially replaces the inhibitory effect of ESG ratings in this area. Further analysis demonstrates that ESG ratings are more effective in reducing relationship-based transactions in industries with higher asset specificity such as high-tech companies. Additionally, our study indicates that ESG ratings can significantly lower such transactions, demonstrating a notable improvement in reducing abnormal relationship-based transactions. Finally, economic consequence tests reveal that ESG ratings can significantly improve operating performance and investment efficiency by reducing relationship-based transactions.The findings offer significant empirical evidence and valuable insights for the development of ESG rating systems and the strategies to reduce relationship-based transactions in emerging market countries.