| In recent years,the importance of sustainable development has become more and more important as government agencies and cooperative organizations around the world focus more and more on climate and environmental risks,while green finance has also entered a period of rapid development,and a large number of enterprises have started to participate in various ESG(environmental,social responsibility and corporate governance)related projects through mandatory and non-mandatory disclosure.At present,our government should attach great importance to cultivating enterprises’ awareness of environmental protection,green development and social responsibility,and encourage them to do more in these three areas,and promote the implementation of "carbon peak" and "carbon neutral" policies through various measures.In this context,financial institutions are also participating in the current financial system reform to promote the development of green finance,and ESG corresponds to the long-term development of society,which is becoming more and more important: environmental issues such as depletion of natural resources,environmental pollution,global warming;social issues such as the disparity between rich and poor,unfair treatment of special groups of people;corporate governance such as proxy,financial fraud,etc.As time goes by,enterprises face higher and more detailed requirements for ESG disclosure from the social level and management in their production and business environment,and investment institutions gradually incorporate ESG assessment of projects into their own decision-making process,enterprises need to continuously improve their ESG ratings,enhance their own ESG disclosure and continuously refine their ESG disclosure in order to effectively attract the attention of more large asset management institutions and obtain wider financing channels.ESG disclosure level and continuous refinement.As an important part of corporate management and development strategy that responds to the needs of the times and society at this stage,ESG is increasingly present in the economy and society,so ESG is receiving more and more attention from scholars of various related disciplines.Based on the trade-off theory and principal-agent theory,corporate ESG performance is negatively related to corporate investment efficiency.It can be inferred from the trade-off theory that,due to the limited production and operation resources of enterprises,the behavior of enterprises to obtain better ESG performance by improving their ESG disclosure level and paying more attention and injecting resources to environmental and social responsibility activities than their current level will lead to an increase in production and operation costs of enterprises,resulting in a corresponding"siphon effect The "siphon effect".For the majority of companies,these additional investment expenditures are likely to leave the company with no money to spend on promising investments.As a result,the overall return on investment and investment efficiency of the enterprise will be reduced.From the perspective of principal-agent theory,ESG investment can help management to gain benefits and establish a conscientious entrepreneurial image,thus enhancing personal reputation and building a business empire.The management of a company may increase investments in environmental friendliness and social responsibility in order to improve ESG ratings.The returns of such investments are usually low or even negative,while investments with positive NPV that do not meet management’s evaluation criteria will be abandoned,resulting in the sacrifice of shareholders’ interests.In order to satisfy the interests of non-shareholder stakeholders,management focuses too much on corporate ESG performance and ignores the prospect of profitable investments,increasing inefficient investments.However,according to sustainability theory and signaling theory,ESG investment behavior will improve the investment efficiency of companies.On the one hand,from the perspective of sustainable development,companies with good ESG performance can avoid policy,environmental,and climate risks by actively engaging in environmental risk management,assuming social responsibility,or strengthening internal governance.The reduction of investment risks leads to more scientific investment decisions and more efficient investments.Although short-term ESG spending imposes some costs,it can contribute to business efficiency by saving on spending from other sources.Some scholars believe that corporate ESG performance is closely related to employee quality and employee efficiency,and that companies with high ESG scores can attract more high-quality employees,thus increasing their labor productivity.On the other hand,from the perspective of signaling theory,management actively engages in ESG-related investments,which not only increases the amount of information released by firms,but also improves the quality of information.As an important signaling behavior,more comprehensive and detailed ESG information disclosure can enable enterprises to obtain higher ratings and shape a more responsible social image of enterprises,thus gaining the favor of more investment institutions and asset management companies,which helps enterprises gain more recognition from stakeholders,obtain more financing opportunities in the capital market,reduce resistance in the financing process,and thus significantly reduce the financing cost of enterprises.Good ESG performance can convey more information about a company’s non-financial characteristics,reduce the degree of information asymmetry,and make it easier for companies to obtain external financing.A high ESG rating helps companies build a good image and improve their reputation.These help companies to obtain financial support from external stakeholders such as government subsidies,thus alleviating the problem of underinvestment.Considering the increasing importance of the new concept of ESG in the daily business and governance behavior of firms,and in order to resolve the contradictory results of the above academic studies,this paper proposes the following theoretical hypothesis: entrepreneurs’ time-inconsistent preferences lead to firms’ underinvestment.Under the perspective of time-inconsistent preferences,the optimal ESG engagement strategy and optimal investment strategy of firms fluctuate with the level of corporate reputation.The ESG investment behavior of firms has a substitution effect between capital investment and ESG investment of firms under the perspective of financing cost,and the level of capital investment and ESG participation of firms fluctuate with the change of reputation level of firms.This paper attempts to give different conditions for the impact of ESG on the heterogeneity of firms’ investment efficiency within the framework of standard qtheory,taking into account trade-off theory and signaling theory.Meanwhile,studies by Grenadier,Wang(2007)and Tian(2016)have proposed the view that entrepreneurs’ time preferences distort the optimal capital investment rule.Based on previous studies by these scholars,this thesis constructs a naive representative entrepreneur who optimally allocates resources to maximize firm value compared to a benchmark with time-consistent preferences.This thesis argues that the presence of underinvestment behavior of entrepreneurs with time-inconsistent preferences is plausible,which is very much in line with the predictions in Liu et al.(2016)and Liu,Mu,and Yang(2017)studies.Moreover,the results of this thesis suggest that corporate ESG engagement leads to a crowding-out effect on capital investment.Thus,active ESG engagement behavior of firms can exacerbate the phenomenon of corporate underinvestment.Nonetheless,there is a strong basis for the assertion that some scholars’ ESG engagement strategies may be distorted under different conditions due to the presence of time-inconsistent preferences that lead to inefficient corporate investment.Specifically,for firms with a poor reputation in the market(and a need to improve their reputation),entrepreneurs with time-inconsistent preferences will make very aggressive ESG investments at the expense of the firm’s investment efficiency in order to improve the firm’s reputation more quickly.However,for firms with a better reputation in the market,their managers are less concerned about the firm’s reputation and will instead adopt more conservative ESG engagement behaviors to mitigate the firm’s underinvestment problem.This paper demonstrates that firms’ ESG investment behavior brings a new trade-off between the mitigating effect on investment inefficiencies under time-inconsistent preferences and the damaging effect on the longterm growth rate of the firm’s reputation process.Second,this paper provides an avenue to study the optimal allocation of internal decisions from the perspective of productivity shocks,a new idea based on the study of Marinovic and Varas(2019).This paper enriches the research on the inconsistency of time preferences in the field of corporate finance and creatively constructs a variance index based on managers’ characteristics to measure the inconsistency of firms’ time preferences.With this measure,it greatly facilitates the application of time inconsistent preferences in relevant empirical studies.This paper combines entrepreneurs’ time inconsistent preferences with firms’ ESG engagement strategies and puts them into a standard theoretical model.The predictions of the results in this paper are largely consistent with the relevant prior research literature reviewed-entrepreneurs tend to underinvest in their firms due to time inconsistent preferences.At the same time,entrepreneurs choose a proactive ESG engagement strategy for firms with poor reputations,while conservative ESG engagement is a more desirable growth strategy for reputable firms compared to a timeconsistent benchmark.Notably,this thesis confirms through theoretical derivation and empirical testing that ESG engagement tradeoffs between mitigating capital investment inefficiencies and the long-term growth rate of reputation.The theoretical predictions of this paper are robust and supported by empirical evidence.This paper also demonstrates that corporate ESG investment behavior has a substitution effect between corporate capital investment and ESG investment under the perspective of financing costs,and that corporate capital investment strategies and ESG investment strategies are not static in the process of rising corporate reputation levels,and that corporations make trade-offs between gaining capital gains and taking social responsibility.In this paper,companies’ consideration of financing costs is combined with their ESG engagement strategies and put into a standard theoretical model.The conclusion drawn is that-there is a positive relationship between corporate reputation and capital investment,i.e.the higher the level of corporate reputation,the more the corporate capital investment.The greater the impact of ESG investment on financing costs and reputation,the faster the change of capital investment strategy and ESG investment strategy to the better.The faster the trend of change.Therefore,enterprises should keep up with the market development when making business strategies and investment decisions,maintain a keen sense,pay attention to the degree of attention and influence of ESG concepts in the market,and adjust their business strategies and investment decisions in a timely manner. |
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