Does the Market Value Corporate ESG Ratings? A Complex System Driven by Institutional Investors

Against the backdrop of China’s dual-carbon goals and the growing emphasis on sustainable development, ESG information has become an important non-financial signal in capital markets; yet whether and how it is priced by investors remains unclear. Using a sample of 2018–2024 Chinese A-share listed firms, this study examines the relationship between corporate ESG ratings and firm market value, with a particular focus on the mediating role of institutional ownership and investor heterogeneity. We find that firms with higher ESG ratings exhibit significantly higher market value, indicating that the market assigns a valuation premium to favorable ESG evaluations. Mediation analyses further show that higher ESG ratings are associated with increased institutional ownership, which in turn enhances firm value. Heterogeneity analyses reveal that this mediating effect is primarily driven by long-term institutional investors, whereas medium-term and short-term institutions neither respond systematically to ESG ratings nor transmit ESG rating information into firm valuation. In additional analyses, we show that ESG rating divergence significantly weakens the positive valuation effect of ESG ratings by increasing informational uncertainty and reducing the credibility of ESG rating signals. Overall, this study provides new evidence on the investor-based mechanisms underlying ESG rating-based pricing and highlights the importance of improving the transparency and comparability of ESG ratings in China’s capital market.