Economic Consequences of Environmental, Social, and Governance Performance on Audit Quality in China

Qi Chen; Wenhong Su

doi:10.31181/ijes1512026242

Authors

Qi Chen CUHK Business School, The Chinese University of Hong Kong, Ma Liu Shui, Sha Tin, Hong Kong SAR, China Author https://orcid.org/0009-0002-6086-0355
Wenhong Su School of Accounting, Hangzhou Dianzi University, Hangzhou, Zhejiang Province, China Author https://orcid.org/0000-0001-8086-6821

DOI:

https://doi.org/10.31181/ijes1512026242

Keywords:

Economic consequences, ESG, Audit quality, Operational risk, Information risk

Abstract

This study examines the economic consequences of firms’ environmental, social, and governance (ESG) performance for audit quality in China’s emerging capital market. Using fixed-effects panel regressions, mediation analysis, and a series of robustness, endogeneity, and heterogeneity tests, the study identifies the underlying economic mechanisms. The empirical results show a positive correlation between audit quality and a firm’s ESG performance: higher audit quality is associated with better ESG performance. The mechanism analysis indicates that operational risk and information risk act as mediators in this relationship. Strong ESG performance can reduce both operational and information risks for firms, providing auditors with a more stable economic environment and a clearer information basis, thereby improving audit quality. Heterogeneity analysis further reveals that the positive impact of ESG performance on audit quality is more pronounced in eastern regions and in high-tech and non-heavily polluting sectors. Overall, this study highlights the economic aspects of the ESG–audit nexus and suggests that strengthening ESG practices can improve audit quality and promote a more transparent, efficient, and sustainable environment in emerging markets.

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