ESG and Financial Constraints

. Prior evidence that firm’s environment, society and governance (ESG) performance has a positive impact on its investment behavior, leaves unaddressed whether it has the same impact on corporate financing constraints. Drawing on stakeholder theory and Information asymmetry theory, this study analyzes the issue in a more exhaustive way. Use Chinese A-share listed companies samples from 2009 to 2020, the author analyzes the relationship between ESG performance and financing constraints, and finds that firms with better ESG performance, measured by high ESG ratings, face less financing constraints. This study helps to clarify the economic significance of ESG performance, provides empirical basis for listed companies to attach importance to and improve ESG performance, and has implications for government departments to formulate relevant policies to improve the efficiency of capital allocation and promote high-quality economic development.


Introduction
ESG is a comprehensive evaluation system of companies through three dimensions: environment, society and corporate governance. The concept of ESG originated from ethical investment and responsible investment (Michelson, 2004). With a series of social movements, some shareholders and consumers are willing to sacrifice part of their interest to support enterprises to improve environmental protection technology and the warefare of workers, so as to make the production process more green and efficient. Environment, social responsibility and corporate governance are gradually regarded as a whole to measure the three important dimensions of enterprise sustainable development. China's "14th five year plan" and the long-term goal of 2035 particularly emphasize the need to implement the green development strategy, promote enterprises to improve the management level and innovation capacity of green and low-carbon development, and ensure the realization of the major decision-making goals of "carbon peak" in 2030 and "carbon neutralization" in 2060. The realization of the goals of "carbon neutralization" and "carbon peak" requires the construction of a green and low-carbon circular economy system, which is inseparable from the vigorous development of enterprise ESG rating. If better ESG performance can improve the market value and reduce the financing cost, enterprises will have higher enthusiasm for economic green transformation. Therefore, based on information asymmetry theory and principal-agent theory, this paper empirically analyzes the impact of enterprise ESG performance on enterprise financing constraints with the help of enterprise ESG rating score. The main contributions of this paper are reflected in the following aspects: domestic research on ESG field has just started, and there are few relevant literatures, which mainly focus on the relationship between ESG performance and enterprise investment efficiency and enterprise value. There is little literature studies the impact of ESG performance on enterprise financing constraints. This paper focuses on the analysis of enterprise ESG performance and enterprise financing constraints, expands the economic consequences of enterprise ESG performance and the influencing factors of enterprise financing constraints. At the same time, it provides a new research perspective for alleviating the degree of financing constraints of Listed Companies in China, and also provides a decision-making basis for investors and financial institutions to explore investment value through enterprise ESG performance.

ESG performance reduces corporate financing constraints
Stakeholder theory and resource dependence theory support that ESG performance is conducive to reducing corporate financing constraints. According to these theories, if such disclosure satisfies the information needs of stakeholders and helps them make investment decisions, it will significantly improve the symmetry of market information and enable enterprises to get support from stakeholders in their future development. Thus more external resources needed for enterprise development can be obtained (Chowdhury, 2016;Anwar and Malik, 2020). ESG performance can affect corporate financing constraints through the following aspects: First, a good governance mechanism can significantly reduce corporate financing costs. Companies with a good ESG performance usually have a relatively perfect governance system, which can effectively supervise and restrain management behaviors (Chen, 2003). Second, the active fulfillment of corporate social responsibility can not only improve corporate reputation and establish a good corporate image, but also improve the trust of stakeholders on the enterprise and reduce the explicit or implicit claim on the enterprise, thus reducing the creditors' assessment of the debt paying risk of the enterprise (Shi Junwei, 2009). Third, social responsibility information disclosure plays a similar role to financial information disclosure, which reduces the degree of information asymmetry of enterprises, thus improving the financing environment of companies and alleviating the degree of financing constraints. The higher the quality of information disclosure, the lower the degree of financing constraints (He Xianjie, 2012; Qiu Muyuan at al., 2019). Fourth, enterprises assume social responsibility and conduct environmental risk management often has longterm strategic goals and strong environmental awareness. Good environmental performance reduces the probability of bearing huge environmental fines and increases the willingness of creditors to borrow for a long time, thus reducing the financing constraints of corporates (Shen Hongtao et al., 2014). Based on the above analysis, this paper proposes the following hypotheses: H1a: Good ESG performance can reduce the financing constraints of enterprises

ESG performance increases corporate
financing constraints Tradeoff theory and principal-agent theory support that ESG performance has no effect on firm financing constraints. Since the resources of an enterprise are limited, the investment of all resources should be aimed at seeking the best interests of shareholders. However, the undertaking of social responsibility of an enterprise consumes scarce resources that should be used to earn profits, which damages the corporate development and shareholders' interests. ESG investment usually brings a good reputation to management, which is likely to invest more socially at the expense of shareholders. However, for the majority of enterprises, such investment has nothing to do with their main business. The investment in ESG will exceed their income, resulting in the misallocation of corporate resources and reducing corporate value. At the same time, enterprises with a stronger sense of social responsibility will be more cautious in the appointment and dismissal of employees, while redundant manpower will increase the cost of the enterprise, and further exacerbates the risk of corporate bankruptcy.
Based on the above analysis, this paper proposes the following hypotheses: H1b: ESG is not conducive to reducing corporate financing constraints

Data and sample selection
To select our sample, we considered all firms listed on the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) during the period from 2009 to 2020. We selected the sample starting period of 2009 because disclosures prior to the 2008 CSR disclosure mandate were of insuffcient importance and self-selection related to voluntary disclosure. The ESG rating data comes from WIND database, and enterprise-level financial data is obtained from CSMAR database. The initial sample was sorted out as follows: First, sample from financial and insurance listed companies was deleted, because the financing method and capital structure of the financial industry were significantly different from other listed companies; Second, remove firms labeled as ST, *ST and other abnormal financial status; Third, delete the samples of listed companies with negative net assets and missing data; Fourth, in order to exclude the influence of extreme values on the empirical results, we winsorize each continuous variable at the 1% and 99% levels of their distribution. Finally, the final sample includes 31,699 firm-year observations.

Model specification and variable measures
To test the impact of ESG rating announcement on corporate financing constraints, based on Xiaofang et al.
(2021), the following model (Equation 1) is planned to be used for empirical test: FC , β β * ESG , β * CONTR , ε , 1 The variable indexes involved in the model are calculated as follows: Financing constains. Financing constraint refers to the problem of information asymmetry and agency, which makes the external cost higher than the internal capital cost. There is no unified standard for the measurement of financing constraints and this paper will adopt the KZ index reflecting the degree of enterprise financing constraints. KZ index is calculated as follows: Here OCF, div and cash are operating net cash flow, corporate cash dividend and cash holdings respectively, which are standardized by the total assets at the beginning of the period, Lev is the asset liability ratio and TQ is Tobin Q value. The larger the KZ index, the more serious the financing constraints on listed companies and the lower the financing efficiency. ESG. Based on the ESG evaluation data of Huazheng, quantitatively evaluate the ESG performance of enterprises. China Securities ESG index system is based on the index score, and finally gets nine grades of C ~ AAA. In order to facilitate empirical analysis, this paper assigns the nine grades of C ~ AAA to 1 ~ 9 respectively, so as to obtain the variable ESG. Other control variables. Considering that the characteristics of corporate finance and corporate governance will have an impact on the operation and development of enterprises, this paper controls the impact of enterprise size, asset liability ratio (Lev), proportion of independent directors (indep), board size (board), HHI index, dual virtual variable (dual), etc. Size is the frim size calculated as the natural logarithm of total assets. PPE is total property, plant and equipment. CFO is the cash flow from operations deflated by average total assets. Lev is the ratio of total liabilities to total assets. HHI index is a composite index used to measure industrial concentration to reflect the dispersion and concentration of market size. The calculation formula of HHI is as follows: The main variables in this paper are defined in Table 1.  The statistical situation of ESG disclosure report by year is shown in Table 3. The year in which the sample report is released most is 2020 and the year in which the sample report is released least is 2009, showing an increasing trend year by year. As corporate social responsibility reports of listed companies increase year by year, the enterprise management recognizes that undertaking social responsibility helps to enhance the social image of the enterprise, gain the trust of the government and the outside world, pave the way for the future development of the enterprise and form positive feedback; From the perspective of external factors, the guidance of policy documents issued by the government, the demonstration and leadership of excellent enterprises and the active promotion of industry associations and other institutions may promote more enterprises to pay attention to ESG report disclosure.

Results for the main analysis
This paper discusses the impact of ESG rating on corporate financing constraints, and the regression results are shown in Table 4. Among them, column (1) has no control variables, and column (2) adds control variables that may affect enterprise financing constraints. The results show that there is a significant negative correlation between ESG rating and financing constraints. Taking column (2) as an example, the ESG coefficient is -0.019, which is significantly negative at the level of 1%, indicating that the improvement of ESG rating reduces the financing constraints of enterprises. In an economic sense, every increase in the ESG rating of an enterprise will reduce the financing constraints by 0.019, accounting for 1.88% of the average FC. It shows that good ESG performance can alleviate the financing constraints faced by enterprises by reducing the degree of information asymmetry and improving their reputation. Therefore, hypothesis 1b is not tenable, and the empirical results support hypothesis 1a.

Robustness checks
To further test the reliability of the research results and investigate the stability of the model, the following robustness tests are carried out in this paper: (1) Considering the potential contemporaneous bias, the KZ index is regressed again with a lag of one period, so as to alleviate the endogenous problem of variables to a certain extent. The results obtained are roughly the same as the initial regression results. The results in Table 5 show that the coefficient of the explanatory variable (ESG) lagging behind the first period is -0.213, which is significantly negative at the level of 1%. This shows that the impact of enterprise ESG performance on enterprise financing constraints is sustainable. Actively undertaking social responsibility enable enterprises to obtain intangible assets based on ESG and help enterprises establish long-term competitive advantage.
(2) Two models are adopted. Model 1 is used as the benchmark model and only independent variables are included; Model 2 adds control variables on the basis of model 1 to test the robustness of the results, and the results are roughly the same as the initial regression results. The above empirical test results show that the empirical conclusion of this paper has a strong robustness. 0.173 0.538 Note: t-statistics are corrected using a two-way cluster at the firm and year levels. *, ** and *** indicates significance at the 10%, 5% and 1% levels respectively.

Conclusion
This paper empirically discusses the impact of ESG performance on corporate financing constraints by using the financial data of A-share listed companies from 2009 to 2020. Research found that better ESG performance can significantly reduce financing constraints. The above results are still valid after considering changing variable measurement methods and sample grouping. This study has important practical significance for a comprehensive and in-depth understanding of the impact of ESG performance on corporate financing constraints. The enlightenment of this paper mainly includes the following aspects: First, enterprises should strengthen information disclosure of ESG and value the positive economic consequences of assuming social responsibility.
Many enterprises believe that the cruel competition and the tight resources make them have no spare resources to shoulder social responsibilities. In fact, good ESG performance can help the enterprise forming intangible assets and obtaining sustainable competitive advantage. Second, the supervision department should improve the ESG supervision system. The number of social responsibility reports issued by listed companies is very small compared with the total number of enterprises in China, and the quality of the reports is uneven. Henze relevant regulatory authorities should raise the requirements for ESG reports, unify the disclosure standards, standardize the third-party certification of reports, to ensure the authority of reports. Meanwhile, they can learn from advanced international experience and develop an ESG information disclosure system that suits China's national conditions. Third, government departments should establish and improve mechanisms for post-event correction and punishment. For institutions or enterprises that violate ESG regulations should be corrected afterwards and perfected relevant measures. In order to ensure the implementation of ESG supervision mechanism, the supervision layer and the society should make comprehensive use of interview, punishment, litigation and other channels. By increasing the punishment for false disclosure of ESG information by enterprises, the cost of disclosing false information increased, and enterprises are prompted to make correct ESG decisions, thereby improving the overall operational efficiency of enterprises.