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| Managerial Myopia and Corporate ESG Performance |
| JIANG Fuwei, ZHANG Zhining, DING Hui
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School of Economics, Xiamen University;
The Wang Yanan Institute for Studies in Economics, Xiamen University School of Finance, Central University of Finance and Economics |
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Abstract The concept of Environmental, Social, and Governance (ESG) was formally introduced by the United Nations Global Compact in 2004, reflecting a company's comprehensive performance across these three dimensions. ESG has become a critical criterion for investors to assess and evaluate a firm's capacity for sustainable development. Against the backdrop of high-quality development, ESG performance has not only garnered significant attention from investors but has also emerged as a key determinant of a company's long-term operational success. However, ESG practices in China have shown slow improvement, with companies often prioritizing compliance with disclosure requirements rather than proactively enhancing their ESG performance. Therefore, investigating the underlying factors behind the insufficient ESG investment of Chinese firms and designing effective incentive mechanisms to improve their ESG performance is of significant importance.
This study focuses on the issue that corporate management may lack a broad perspective when investing in ESG projects, making it difficult to achieve optimal investment decisions. Drawing on agency theory and behavioral economics, this paper develops a dynamic contract model incorporating ESG projects and conducts an empirical analysis using a sample of A-share listed firms from 2010 to 2022. First, the dynamic contract model reveals how managerial myopia negatively impacts a firm's ESG performance. Second, an indicator for managerial myopia is constructed based on the analysis of corporate annual reports, with the effects of linguistic sentiment accounted for using a Chinese financial sentiment dictionary and the BERT model. The results confirm the significant negative impact of managerial myopia on corporate ESG performance. Furthermore, the study examines how short-term and long-term incentives affect this negative impact and explores two specific economic mechanisms: information disclosure quality and the ability to attract long-term capital. Additionally, heterogeneity analysis is conducted to examine how firms under varying levels of survival pressure perform in the context of managerial myopia.
The key findings of the study are as follows. First, the higher the level of managerial myopia, the worse the firm's ESG performance. Second, equity incentive schemes mitigate the negative impact of myopia on ESG performance, whereas pay-performance sensitivity exacerbates the damage caused by managerial myopia. Third, the mechanism tests based on information manipulation and long-term capital attraction indicate that managers with limited foresight primarily worsen a firm's future ESG performance by lowering information disclosure quality and weakening long-term capital appeal through opportunistic behaviors. Fourth, heterogeneity analysis using financing constraints, industry competition, and economic policy uncertainty reveals that in high-pressure environments, long-term ESG goals are more likely to conflict with short-term survival objectives, leading managers with limited foresight to abandon long-term targets. The results suggest that corporate governance structures, particularly long-term incentive schemes, require further improvement.
This paper makes three key contributions. First, it innovatively integrates agency theory with behavioral economics by constructing a dynamic contract model that incorporates ESG projects. In doing so, it accounts for managerial decision-making, particularly the behavioral patterns associated with managerial myopia. This integration offers a novel theoretical tool for understanding managerial behavior in ESG-related decision-making. Second, this study addresses a gap in existing ESG research by introducing managerial myopia as an internal corporate perspective, providing practical recommendations for personnel appointments and operational management in the context of corporate sustainable transition. Third, both the theoretical analysis and empirical results demonstrate that equity incentives can mitigate the negative impact of managerial myopia on corporate ESG performance. Moreover, the study identifies two key economic mechanisms through which managerial myopia exerts a detrimental effect: deteriorating information disclosure quality and reducing the firm's ability to attract long-term capital. These findings offer insights into improving long-term incentive schemes and standardizing information disclosure in the process of advancing corporate ESG initiatives. Additionally, heterogeneity analysis reveals that when firms face significant survival pressures, the negative impact of managerial myopia on ESG performance intensifies. This suggests that firms should align ESG-related efforts with other strategic decisions and increase long-term incentives for management teams, to ensure steady improvement in ESG outcomes,especially in high-pressure environments.
Overall, this paper focuses on addressing the practical challenge of improving ESG performance among listed firms in China. By incorporating the long-term nature of ESG into the traditional agency problem through the lens of managerial myopia, the study enriches the literature on corporate sustainability from a behavioral finance perspective. It also provides decision-making guidance for firms navigating a smooth and stable transition under the “dual-carbon” strategy, helping to alleviate transitional pains.
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Received: 16 October 2023
Published: 02 October 2024
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