Institutional Investors, ESG Governance and Corporate Investment Efficiency

Abstract

Institutional investors, ESG governance and corporate investment efficiency constitute a set of highly interrelated research topics in corporate finance. As sustainable investment concepts take root in capital markets, the role of institutional investors has undergone substantial changes. Rather than merely pursuing financial returns, these market participants have stepped forward to supervise corporate ESG practices from an external perspective. ESG governance mitigates internal agency conflicts within firms and partially bridges information gaps in capital markets, thereby reshaping corporate investment decision logic. Existing literature has yet to establish a complete analytical framework, and the intrinsic interaction paths among the three variables remain to be systematically sorted out. Taking the “institutional investor ESG governance investment efficiency” framework as the core analytical thread, this paper reviews domestic and international research findings across three dimensions: direct effects, moderating effects and mediating mechanisms. Empirical evidence suggests that improved ESG performance can boost corporate investment efficiency, yet such effect fluctuates with the actual governance engagement of institutional investors. Heterogeneous institutional investors produce differentiated moderating outcomes for the ESG investment efficiency nexus. Pressure resistant and long term oriented stable institutions deliver positive governance effects, whereas pressure sensitive and short term trading oriented institutions may exert weak or even adverse influences. Most empirical models adopt one way transmission chains and seldom examine two way feedback between ESG governance and investment efficiency. Based on literature collation, this paper further identifies promising research directions, including real world disturbances caused by ESG rating divergence, institutional investors’ strategic trade offs between “voice” and “exit”, and unique transmission logic shaped by China’s institutional context.