ESG and Administrative Costs in Equity Trading: Evidence from China

Lanchun Huang; Zhan Wang

doi:10.36923/iefrontiers.v27i2.271

Open Access Article Finance

Lanchun Huang ⁽¹⁾, Zhan Wang ⁽²⁾

(1) Interdisciplinary Studies College, Payap University, Thailand,

(2) Research Center of Finance, Shanghai Business School, Shanghai, China

https://doi.org/10.36923/iefrontiers.v27i2.271

Issue
Vol. 27 No. 2 (2024)

Submitted
August 22, 2024

Published
October 20, 2024

Keywords:

ESG Performance, ESG-Cost Framework, Administrative Costs, Return Prediction, Portfolio Stock Selection, Corporate Governance, Sustainable Investing

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Abstract

Recent findings suggest that firms with higher Environmental, social, and governance (ESG) scores may experience lower stock returns, contrary to the common belief that better ESG performance enhances market reputation and stock returns. This study aims to investigate the relationship between ESG performance, management costs, and stock returns by introducing an "ESG-cost framework." The framework proposes that the costs incurred in implementing ESG practices can reduce revenue, offsetting the positive effects of strong ESG performance. Using an empirical analysis of firms based on both their ESG scores and management costs, the study finds that firms with low management costs gain the most from high ESG scores, while those with high costs may see diminished stock returns despite strong ESG performance. Additionally, the study proposes trading strategies that integrate ESG scores and cost considerations, demonstrating that these strategies yield better returns than traditional market indices. These findings offer a new perspective on ESG decision-making and provide valuable insights for constructing effective trading strategies.

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Authors

Lanchun Huang

Interdisciplinary Studies College, Payap University

https://orcid.org/0009-0002-5509-7746

Zhan Wang

Research Center of Finance, Shanghai Business School, Shanghai

https://orcid.org/0000-0002-1639-3529

zhanwang9920@163.com (Primary Contact)

Author Biographies

Lanchun Huang, Interdisciplinary Studies College, Payap University

Huang Lanchun, Professor, member of the expert pool for the Chinese Ministry of Education. The main research field is social problem analysis in China. The author has published more than 20 research articles and won more than 5 research awards.

Zhan Wang, Research Center of Finance, Shanghai Business School, Shanghai

Zhan Wang, Ph.D. Assistant professor in finance. The main research fields are risk management, asset pricing, and green finance. The author has published more than 10 research papers in high-quality journals, which include the Journal of Financial Research, Financial Research Letter, and Economic Modelling.

Huang, L., & Wang, Z. (2024). ESG and Administrative Costs in Equity Trading: Evidence from China. Innovation Economics Frontiers, 27(2), 98–109. https://doi.org/10.36923/iefrontiers.v27i2.271

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