A STUDY ON THE RELATIONSHIP BETWEEN FINANCIAL INDICATORS, ESG PERFORMANCE, AND STOCK PRICES OF LISTED BANKS IN CHINA

This study explores the relationship between financial performance, ESG
(Environmental, Social, and Governance) performance, and the stock prices of
listed banks in China. Motivated by the increasing global attention on sustainable
finance, the research addresses a key gap in the literature by focusing on the
Chinese banking sector—an emerging market context where ESG integration is still
evolving. The study's objective is to empirically test whether conventional financial
metrics and ESG scores significantly influence stock valuation in this sector. The study utilizes panel data regression analysis on a balanced dataset of 42
listed banks over a nine-year period from 2015 to 2023, resulting in 378
observations. The dependent variable is stock price, while the independent variables
consist of five financial indicators—Return on Assets (ROA), Net Interest Margin
(NIM), Capital Adequacy Ratio (CAR), Cost-to-Income Ratio (CIR), and Non- Performing Loans (NPL)—as well as the ESG performance score. The panel
regression model is selected based on Chow and Hausman tests, both of which
favor the fixed effects model, allowing control for unobserved heterogeneity across
banks. Descriptive statistics reveal significant variability among the variables, particularly in ROA and stock prices, with high standard deviations and skewness
values, indicating potential outliers or non-normal distributions. The correlation
analysis shows weak-to-moderate relationships among the predictors, with no sign
of multicollinearity. These preliminary analyses confirm the suitability of the data
for panel regression analysis. The panel regression results indicate that NIM, CAR, and CIR have
statistically significant positive effects on stock prices. These findings align with
prior research suggesting that core profitability, financial strength, and operational
structure are critical to market valuation (e.g., Athanasoglou et al., 2008; Berger &
Bouwman, 2013). Investors appear to reward banks with robust lending margins
and capital buffers, viewing them as more resilient and efficient. Conversely, ROA and NPL do not exhibit statistically significant effects on
stock price, even though their coefficients show the expected positive and negative
signs, respectively. The lack of significance may reflect overlapping explanatory
power with other variables or market adjustments to these risks through regulatory
disclosures. This result partially rejects the hypotheses related to these variables and
signals a need for further exploration of bank-specific dynamics. A particularly unexpected result is the negative and marginally significant
effect of ESG performance on stock prices. While many global studies suggest a
positive relationship between ESG and firm value (e.g., Dhaliwal et al., 2012; Khan
et al., 2016), this study finds a weak negative association, suggesting that investors
in China may not yet perceive ESG as a value driver. Potential reasons include
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immature ESG reporting standards, low investor awareness, or the perception of
ESG efforts as compliance costs rather than strategic assets. The findings provide empirical support for the signaling theory in the
context of financial indicators, where strong performance signals attract investors. However, the same does not hold true for ESG, possibly due to weak institutional
frameworks or information asymmetry regarding ESG practices. This reflects
broader concerns in the literature about the effectiveness of ESG disclosures in
emerging markets (Mohammadian et al., 2022). Practically, the results suggest that bank managers should focus on
improving core financial metrics, especially NIM and CAR, to enhance stock
valuation. Regulators are advised to strengthen ESG reporting frameworks and
transparency requirements to build investor trust and ensure ESG practices become
relevant in capital markets. For investors, caution is warranted in using ESG scores
for valuation until more consistent and material ESG data becomes available. In conclusion, this study confirms that financial indicators remain the
primary drivers of bank stock prices in China, while ESG performance has yet to be
fully integrated into market valuation. The results highlight the critical need for
regulatory reform and investor education to enhance the role of ESG in shaping
financial outcomes. Future research is recommended to examine moderating factors
such as ownership structure, investor types, and regulatory enforcement in
influencing the ESG–performance nexus. Through its focus on China’s banking sector, the study contributes to the
broader understanding of how sustainability and financial metrics interact in
emerging markets. It provides valuable insights for academics, practitioners, and
policymakers seeking to balance profitability and sustainability in the evolving
landscape of responsible banking and investment.