Capital Factor Market Integration and Corporate ESG Performance: Evidence from China

This study investigates the impact of city-level capital factor market integration on corporate ESG performance, using a sample of Chinese A-share listed companies from 2010 to 2024. We find that greater capital factor market integration significantly improves firms’ overall ESG performance. Mechanism analysis reveals that capital factor market integration operates through three channels: market competition, technological advancement, and attention reconstruction, enhancing both firms’ capabilities and incentives to engage in ESG activities. The positive effect is stronger for state-owned enterprises, firms in less polluting industries, and those in regions with high government environmental attention. Further analysis indicates that capital factor market integration suppresses corporate greenwashing behavior and reduces discrepancies across ESG rating agencies. Moreover, capital factor market integration exhibits asymmetric effects across ESG sub-dimensions, significantly improving environmental and governance performance while weakening social responsibility performance. This reflects firms’ preference, under competitive pressure, for environmental and governance domains characterized by shorter payback periods and more readily quantifiable outcomes, as well as their cautious stance toward the social responsibility domain where effects take considerably longer to materialize. This study contributes to understanding the micro-level mechanisms through which capital factor market integration influences corporate sustainable development, providing empirical evidence for China’s construction of a unified national market and the advancement of sustainable development strategies.