sustainability

Article
The Moderating Role of Ownership Concentration on Financing
Decisions and Firm’s Sustainability: Evidence from China
Kankan Wen 1 , Andrew Agyemang 2, * , Noha Alessa 3 , Inusah Sulemana 4 and Abednego Osei 4

1 School of Chinese Language and Literature, Ningxia Normal University, Guyuan 756000, China;
[email protected]
2 School of Business, SDD—University of Business and Integrated Development Studies,
Wa P. O. Box WA64, Ghana
3 Department of Accounting, College of Business and Administration, Princess Nourah bint Abdulrahman
University, P. O. Box 84428, Riyadh 11671, Saudi Arabia; [email protected]
4 School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China;
[email protected] (I.S.); [email protected] (A.O.)
* Correspondence: [email protected]

Abstract: We examined the impact of financing decisions on a firm’s sustainability in China as

it aspires to achieve carbon neutrality. To proxy firms’ sustainability performance, we proposed
an index for environmental, social, and governance (ESG) performance. The financing decision
was proxied by debt funding and equity funding. Using secondary data from China Stock Market
Accounting Data from 2016 to 2022, we utilize the fixed effect and fully modified ordinary least squares
estimators for the empirical analysis. The analysis indicated a favorable link between debt funding
and ESG performance. We uncovered an inconsistent association between equity funding and ESG
performance. Moreover, ownership concentration revealed a significant role in moderating the impact
of debt financing and ESG performance in China. The findings affirm that firms should rely on debt
funding rather than equity funding to enhance their ESG performance. Hence, policymakers should
enact laws allowing easy access to debt funding for companies to ensure higher ESG performance.
This, in the long term, will contribute to the Chinese dream of carbon neutrality.

Keywords: financing decision; capital structure; ESG performance; ownership concentration; China
Citation: Wen, K.; Agyemang, A.;
Alessa, N.; Sulemana, I.; Osei, A. The
Moderating Role of Ownership
Concentration on Financing 1. Introduction
Decisions and Firm’s Sustainability: Sustainability Reporting (SR) has gained popularity worldwide following the Brundt-
Evidence from China. Sustainability land Report in 1987, where the integration of human and ecological development concerns
2023, 15, 13385. https://doi.org/
came to light. The term “environment social and governance (ESG)” is primarily used in
10.3390/su151813385
the capital markets to refer to issues that investors consider to assess a company’s capacity
Received: 31 July 2023 to manage risks associated with sustainability and to spot new opportunities for generating
Revised: 30 August 2023 long-term value for stakeholders [1]. The increased desire for firms to invest in sustain-
Accepted: 31 August 2023 ability operations and voluntary initiatives has helped ESG acquire significant traction in
Published: 7 September 2023 recent years [2,3]. The ability of firms to manage their long-term sustainability depends
on their financing decisions. Financing decisions are often interchangeable with capital
structure (CS). The CS represents the corporate entity’s financial framework, which consists
of equity and debt to fund the company’s assets and general activities [4].
Copyright: © 2023 by the authors.
The link between a company’s capital structure and ESG performance can be im-
Licensee MDPI, Basel, Switzerland.
pacted by ownership concentration. Concentrated ownership can enable shareholders
This article is an open access article
to exert more significant influence over corporate decisions. This may involve actively
distributed under the terms and
engaging with board members and management to prioritize ESG considerations and push
conditions of the Creative Commons
Attribution (CC BY) license (https://
for sustainable practices. According to [5], the quality of corporate social responsibility
creativecommons.org/licenses/by/
performance is positively impacted by ownership concentration. Similarly, [6] discovered
4.0/). that ownership concentration had a favorable impact on sustainability performance. Thus,

Sustainability 2023, 15, 13385. https://doi.org/10.3390/su151813385 https://www.mdpi.com/journal/sustainability

Sustainability 2023, 15, 13385 2 of 14

increased ownership concentration can affect company ESG performance by considering

each specific facet of governance, social responsibility, and environmental performance.
More research needs to be done on how financial factors like capital structure (CS)
affect ESG involvement or disclosure. Most studies on capital structure focus on firms’
financial performance and firm value [7,8]. Few studies have analyzed the effect of fi-
nancing decisions on sustainability [9]. Even with the few studies, none of the earlier
studies used ESG as a proxy for sustainability performance. Moreover, with its potential
influence on decision-making and long-term orientation, ownership concentration adds
a new dimension to understanding how financial decisions influence a firm’s dedication
to ESG practices. While prior studies have investigated the connection between capital
structure and sustainability [10,11], the role of ownership concentration is always left out
when examining the impact of financing decisions on sustainability performance. This
study, therefore, sets the pace for addressing this significant literature gap.
This study investigates how capital structure affects ESG performance outcomes in
China. The study adds to the knowledge of how capital structure decisions affect a firm’s
capacity to address ESG concerns. The study relies on trade-off theory to bridge the gap
between traditional financial analysis and sustainability practices by investigating the
relationship between financing decisions and sustainability. By recognizing the relationship
between capital structure and ESG performance, investors can make better-informed
decisions about financial approaches and commitments to sustainability. The results may
guide decision-makers, such as managers, shareholders, and authorities, in ensuring
appropriate financing decisions that will promote sustainability in the long run.
The significance of the research stems from its potential to shed light on crucial
firm dynamics. Recognizing how ownership concentration, a critical structural aspect,
connects with financing choices and their ensuing impact on the sustainability outcomes
of firms could provide invaluable insights given China’s complex business environment
and business-changing market conditions. By examining the complex relationship between
ownership concentration, financing decisions, and sustainability outcomes, this study
provides valuable insights into how corporate ownership structure can either strengthen or
reduce the effect of financial strategies on a company’s long-term viability. Understanding
these dynamics becomes not only academically significant but also practically essential for
policymakers, investors, and business executives attempting to navigate the complexities
of the Chinese business environment as it continues to play an increasingly central role in
the world economy.
The study’s novelty is how we combine two crucial research fields: finance and
sustainability. By examining the impact of capital structure on ESG performance, the
study bridges the gap between financial decision-making and sustainable practices by
highlighting their interdependence. By concentrating on the unique study query of the
influence of capital structure on ESG performance and considering the moderating role of
ownership concentration, this study brings a new perspective to the intersection of finance,
sustainability, and corporate governance.
The authors utilized a quantitative research design to examine the influence of CS on
ESG performance. Secondary data from 223 companies in China from 2016 to 2022 was
used in this research due to data availability. The authors employed stepwise regression by
using the fixed effect and fully modified ordinary least squares estimators. The empirical
results revealed that debt funding substantially influenced ESG performance, while equity
funding was negatively associated with ESG performance for manufacturing firms in
China. The findings contribute to academia and are considered crucial for developing ESG
literature. Furthermore, the results will enable the management of corporations to make
pre-informed decisions on whether to finance a firm’s ESG initiatives with debt or owners’
equity and aid the management in maximizing firm value and reputation.
Additionally, this research contributes significantly to the existing literature in two
major ways. Firstly, an exciting aspect of this study is using Environmental, Social, and
Governance (ESG) measurements as a primary tool for assessing a firm’s sustainability,
Sustainability 2023, 15, 13385 3 of 14

making it distinct from previous research. By incorporating ESG metrics, the study com-
prehensively evaluates a firm’s sustainability performance beyond conventional financial
indicators. This novel approach enables a more comprehensive understanding of how
financing choices influence a firm’s sustainability profile. With regard to the practical impli-
cations, the findings provide policymakers with more insights concerning which financing
choice has a more decisive influence on a firm’s sustainability. Hence, policymakers can
enact laws that will allow easy access to debt for companies to ensure higher performance
of ESG. This, in the long term, contributes to the Chinese dream of carbon neutrality.
The following section focuses on literature review and hypotheses development. The
third section elaborates on the methods by providing information on the sample, sampling
processes, and population used in the study. Section 4 gives an account of the data analysis
and results, while the final part offers the study’s conclusion.

2. Literature Review
2.1. The Three Foundations of ESG
ESG’s three pillars are environmental, social, and governance considerations. These
three are the most essential criteria to consider when evaluating a firm’s sustainability and
moral effect [12]. The three pillars substantially influence a firm’s performance and market
returns. Consequently, determining a company’s long-term sustainability potential may be
influenced by how well each of the three pillars performs.
The environmental (E) pillar covers a wide variety of topics. It mainly focuses on how
a company manages the environment. As climate change is one of the most significant
ecological concerns that stakeholders, financial managers, and organizational investors
study, the environmental pillar often attracts the most attention [13]. All firms face systemic
danger from climate change, and environmental law infractions often result in significant
penalties [14]. Hence, businesses have started positioning themselves tactically to cope with
climate change’s increasing elastic sensitivity impacts and solve this issue. Understanding
how environmental sustainability affects financial performance is crucial [15].
The social (S) pillar looks at a firm’s relationships with its workers, vendors, customers,
and the community in which it works [16]. A company might use social concerns and
problems to strengthen these relationships. In an era where information travels fast and
investors may see and respond to a firm’s social behavior in a moment, humanitarian rights,
safety, and child labor play a vital role in investment choices [17].
The governance (G) pillar, which is the last, shows how a company manages its top
management, executive remuneration, internal controls, and shareholder rights. In contrast
to the E and S pillars, the governance pillar concentrates on how a firm operates within
itself rather than how its activities affect the outside world. The performance of the business
must be tracked and reported on to evaluate governance mechanisms. Investors want to
know if a firm’s accounting processes are precise and open and whether they are given
the chance to vote on essential matters [14]. A firm’s financial performance is adversely
affected by poor corporate governance [18]. Consequently, more investors are speaking out
in favor of corporate governance swings, especially in the wake of the Great Recession [18].

2.2. Theoretical Justification—Trade-off Theory

According to the trade-off theory, costs and advantages should be weighed before
choosing the source of financing to determine the best mix of debt and equity funds [19].
This trade-off will result in an optimal CS with the same additional benefits and reduced
loan expenses, raising the firm’s value [20]. Debt financing has various benefits, including
tax breaks and financial leverage. Firms that incur debt may deduct interest charges from
taxable revenue, lowering their tax burden. This boosts the firm’s worth by increasing
the cash flow available for investment [21]. However, debt financing comes with fees and
dangers. Firms must pay interest regularly and refund the principal amount at maturity [22].
If a firm’s cash flows are inadequate to satisfy its commitments, it may be forced to declare
bankruptcy. As the amount of debt in the firm’s capital structure rises, so does the danger
Sustainability 2023, 15, 13385 4 of 14

of a financial crisis. As a result, choices on funding sources are made in light of the firm’s
agenda and strategy for attaining its objectives and maximizing its value.
The choice of funding may depend on corporate plans about ESG, the level to which
they accept such endeavors, and the viability of their expected advantages since ESG
defends the firm from risk and boosts its capacity to sustain its value [23,24]. The settlement
between the additional expenses and advantages of participating in these endeavors, as per
Xu [25], includes optional company reporting policies, for instance, social and ecological
obligations. As a result, many businesses trade off ESG activities to determine their
value [26]. In contrast, others view ESG activities as essential to their plans and dedication
to several stakeholders within their strategies to maximize shareholders’ value.

2.3. Empirical Review and Hypotheses Development

2.3.1. Debt Funding and Firms Sustainability
According to Villarón-Peramat [27], liability can be a proper control tool and enhance
corporate governance. Higher ESG performance can be provided by businesses that benefit
from a high degree of supervision and responsibility. Additionally, corporate society
accountability and capital mix are potent mechanisms for a company’s success in uncertain
economic conditions and potential threats [23]. Management may use debt to envelop
the expense of social accountability endeavors at the cost of equity holders to improve
their reputation [28]. Companies may also create an investment strategy centered on social
responsibility via capital financing [28]. Benlemli [29] asserts that businesses with high
levels of disclosure compliance rely heavily on loan maturities to fuel their sustainability
initiatives and enhance their brand. As a result, enterprises provide adequate data about
their ESG implementation to boost their image and raise stakeholder satisfaction.
According to a study by Al Amosh [10], financing by debt improves ESG performance
across the board, while funding by equity has no impact on ESG. As a result, businesses
emphasize debt financing rather than equity to meet their financial and non-financial aims.
This is because new shareholders’ opportunism will probably force them to prioritize
increasing their worth at the expense of other stakeholders, which will negatively impact
the ESG performance of the companies. Similarly, Chen [30] posits a strong correlation
between economic debt and taking on environmental responsibility. In contrast, a negative
correlation between ecological disclosure and leverage ratio was found by Bae [31]. Based
on the reviewed literature, the authors assume the following:

H1. Debt funding is positively linked with the ESG performance of firms in China.

2.3.2. Equity Funding and Firm Sustainability

According to the trade-off theory, businesses must choose between the advantages
of debt financing—tax advantages and cheaper capital costs—and its drawbacks [32].
Businesses may be able to prioritize sustainable initiatives without worrying that they
will be saddled with excessive debt that will make it difficult for them to accomplish
sustainability targets [33].
According to research by Adeneye [34], firms with larger equity financing ratios
often perform better regarding ESG factors because equity funding gives them more
financial flexibility to launch long-term sustainability initiatives without worrying about
debt payments. The compensation between the additional expenses and advantages of
participating in this endeavor, as per Xu [25], includes optional company reporting policies,
such as social and ecological responsibility. Equity issuance might indicate information
asymmetry or an undervaluation of the company’s stock, which could impact how investors
see the company’s commitment to sustainability. Hence, we assume the following:

H2. Equity funding has a negative impact on the ESG performance of companies in China.
Sustainability 2023, 15, 13385 5 of 14

2.3.3. Ownership Concentration, Debt Funding, and Firms Sustainability

Ownership concentration adds another dimension of influence to the relationship
between debt financing and sustainability performance. Companies with concentrated
ownership may be more committed to sustainable practices when using debt financing since
there may be a closer connection between owners’ interests and sustainability aims [35].
For instance, state-owned businesses may be required by law to respect environmental
and social norms, which might be strengthened through debt-financed projects geared
towards sustainability goals. Conversely, agency issues may result from ownership con-
centration when the dominant shareholders put their interests ahead of sustainability.
This could lead to businesses ignoring sustainability factors while using debt to increase
shareholder wealth in the near term [36]. Private firms with concentrated ownership may
have comparable difficulties since sustainability imperatives and dominant interests may
only sometimes coincide.
The capacity of a corporation to engage effectively with its constituents may be
impacted by ownership concentration. Concentrated ownership arrangements may make
it easier for significant shareholders to communicate with firm management, improving
knowledge of stakeholders’ issues and, as a result, ESG responsiveness [37]. Although
some studies have identified a link between concentrated ownership and improved social
performance, other investigations have found no conclusive evidence. The unique goals
and values of the largest stockholders have a significant impact on major decisions such as
sustainability reporting. Thus, large owners can exercise more influence on management,
leading to more responsible and sustainable policies [38]. Therefore, we assume the following:

H3. Ownership concentration positively impacts the relationship between debt funding and
ESG performance.

2.3.4. Ownership Concentration, Equity Funding, and Sustainability

Ownership concentration significantly impacts how equity financing is used to boost
sustainability performance [35]. The congruence between ownership’s strategic aims and
sustainability goals may be more evident in businesses with concentrated ownership, such
as state-owned firms or businesses run by a single family [39]. When equity funding
is used, this connection can lead to a higher focus on sustainable activities. In one in-
stance, concentrated ownership may place a higher priority on long-term value creation
than on maximizing short-term profits, perhaps leading to more significant investment in
sustainability initiatives and methods.
On the other hand, ownership concentration may also result in conflicts of interest.
A financing distribution of stock that only partially supports sustainable efforts might
result from dominant owners prioritizing their financial interests above sustainability
considerations [40]. This may be especially important for privately held businesses when
family interests are intimately entwined with ownership. Additionally, the moderating
impact of ownership concentration may change how businesses convey their commitment
to sustainability to outside stakeholders. Companies with concentrated ownership may
have a better channel of communication between ownership goals and sustainability
activities, resulting in sustainability reporting that is more effective and trustworthy [41].
Therefore, we hypothesize the following:

H4. Ownership concentration has a negative impact on the relationship between equity funding
and ESG performance.

3. Methods
3.1. Sampling and Data Sources
The study used manufacturing companies listed in China for the study due to the
high carbon emissions from China as a result of increased production activities [3]. Since
production produces some extent of ecological harm, there is a need for policymakers
Sustainability 2023, 15, 13385 6 of 14

in China to know how the capital structure of companies can be controlled to ensure
China’s dream of carbon neutrality. Purposive sampling was used to select firms with
readily available data on the China Stock Market and Accounting Research (CSMAR)
database from 2016 to 2022. The final data extracted were made up of 138 firms from
the Shanghai Stock Exchange and 85 firms from the Shenzhen Stock Exchange, making
223 listed manufacturing firms. The study relied on secondary data from CSMAR, financial
statements, and the annual reports of the sampled manufacturing firm.
With regard to the dependent variable, the study employed the content analysis technique
and, based on the Thomson Reuters ESG scores, the China Environmental Protection Agency
requirements, the listing requirements regarding ESG inclusiveness by the Shanghai Stock
Exchange, and the firms’ social conducted to society, as guided by China’s Commerce Industry,
to develop an index to quantify ESG. The authors based their conclusions on these policy
guide documents since they provide a comprehensive approach to ESG.
The index is categorized into three primary headings: environmental, social, and
governance. Three themes were identified under the environmental score: resource con-
sumption, emissions, and innovations. The social score recognized four themes: labor,
humanitarian rights, society, and product responsibility. In addition, management, stake-
holders, and corporate social responsibility were found under the governance score. In
total, there are 10 themes for the three ESG scores. Under each theme, there are some
specific items of measurement. We assigned 4 points if the item was disclosed completely,
2 points for fairly disclosed items, and 0 points for items not disclosed. Table 1 provides
the scoring items for ESG.

Table 1. Scoring items for ESG.

Pillars Themes Details

Water efficiency policy
Resource use Energy efficiency policy
Environmental supply chain management
CO2 reduction
Environmental Emissions Ecological management system
Ecological expenditure
Environmental research and development costs
Innovation Energy footprints reduction
Product innovation/product impact minimization
T&D policies
Workforce Health and safety policy
Diversity and opportunity policy
Human right policy
Human rights Human rights contracts
Child labor
Social
Community policy/investment initiatives
Community Cash donations or donations in kind
Crisis management system
Product responsibility policy
Product
Customer satisfaction
responsibility
Product access low price
Board diversity
Management Audit committee expertise/independence
Compensation/bonus payment
Confidential voting rights
Governance Stakeholders Shareholders policy
Staggered board structure
ESG reporting and transparency
CSR Strategy GRI reporting guideline
Sustainability Committee/CSR committee
The ESG index is made up of three main pillars: Environment, Social, and Governance. The environment pillar
consists of three themes. The social pillar consists of four themes, and the governance pillar consists of three themes.
In all, the ESG index is made up of ten themes, which have three measuring indicators each for the ten themes.
Sustainability 2023, 15, 13385 7 of 14

ESG is then estimated as follows:

Number of items disclosed in the yearly report of firm
ESG = (1)
total number of items on the disclosure check list

3.2. Model Specification

To establish the link between CS and ESG, the authors developed the model below:

ESGit = αo + β1 DF + β2 FSIZit + β3 FAGEit + β4 PROit + ε (2)

ESGit = αo + β1 EFit + β2 FSIZit + β3 FAGEit + β4 PROit + ε (3)

ESGit = αo + β1 DFit + β2 EFit + β4 FSIZit + β5 FAGEit + β6 PROit + ε (4)

The following regression model examines the moderating influence of ownership
concentration on the impact of CS on ESG performance.

ESGit = α0 + β1 (DF it × OCit ) +β2 (EF it × OCit ) + β4 FSIZit + β6 FAGEit + β7 PROit + εit (5)
where ESG represents Environmental, Social, and Governance, DF denotes Debt funding,
EF denotes Equity funding, OC represents ownership concentration, FSIZ denotes Firm
size, FAGE represents firm age, and PRO denotes profitability. The error term and constant
are also included in the model, denoted by the symbols α and ε, respectively.

3.3. Definitions and Measurement of Variables

The study variables are summarized in Table 2.

Table 2. Summary of research elements.

Categories of
Variables Notion Measurement Expected Sign
Variables
The unweighted scoring
Environmental, social, method by dividing the actual
Dependent variable ESG
and governance performance/disclosure score
by the highest score
Measured as the long-term
Debt funding DF +
Independent variables liability over total assets
Equity funding EF Total equity over total assets −
Ownership stake of the largest
Ownership
Moderating variable OC shareholders by the total +
concentration
outstanding shares
Firm size FSIZ Number of employees +
The year of first listing on the
Control variables Firm age FAGE stock exchange is less than the +
current year (2023).
Profitability PRO Net income over total assets −

4. Results and Discussion

4.1. Correlation Analysis
The Spearman correlation matrix, shown in Table 3, illustrates the strength of relation-
ships among the variables. We chose the Spearman correlation since it is a reliable indicator
of the relationship between continuous variables [42].
Sustainability 2023, 15, 13385 8 of 14

Table 3. Spearman correlation matrix.

ESG DF EF OC FSIZ FAGE PRO

ESG 1.0000
DF 0.1121 1.0000
EF −0.7148 *** 0.0679 1.0000
OC 0.2667 *** −0.0850 0.1206 1.0000
FSIZ 0.0450 0.1990 0.0640 −0.0779 1.0000
FAGE 0.0364 0.0748 −0.0728 0.0439 −0.1458 * 1.0000
PRO −0.1855 ** −0.1106 0.0573 0.2248 *** −0.2937 *** −0.0389 1.0000
Significant at 10% *, 5% **, and 1% ***.

The findings from Table 3 indicate that debt funding (DF), ownership concentration,
and ESG are positively correlated. However, equity funding (EF) and ESG performance are
negatively correlated at a 1% significant level. Profitability had a strong negative link with
ESG performance at a 5% significant level, although firm size and firm age appeared to have
negligible positive correlations with ESG. The correlation matrix revealed a combination of
feeble and moderate correlations amongst the study variables, with EF and ESG recording
the greatest absolute correlation. In contrast, FAGE and ESG revealed the lowest absolute
correlation, implying that the variables are highly related. This suggests that FAGE does
not matter when it comes to ESG performance. Additionally, Table 3 demonstrates that no
predictor pair has a correlation coefficient greater than 0.80, indicating that our dataset is
not multicollinear. This means that multicollinearity is not an issue in the way we acquire
our data.

4.2. Cross-Sectional Dependency Test

Naturally, several variables, including the strength of the relationship between cross-
sections and the kind of cross-sectional dependency, influence the effect of cross-sectional
dependence in the estimate [43,44]. It demonstrates how a significant drop in estimating
efficiency can occur if there is enough cross-sectional dependence in the data, which needs
to be considered in the estimation. In this study, the Frees test of cross-sectional dependence
is applied. Table 4 shows the findings of the CD results.

Table 4. Cross-sectional dependency test.

Frees’ Test of Cross-Sectional Dependence = 0.755

Critical Values from Frees’ Q Distribution
alpha = 0.010 0.3583
alpha = 0.05 0.4923
alpha = 0.01 0.7678

Frees’ test disproves the null hypothesis of cross-sectional dependence, as shown in

Table 4. The critical values for = 0.10, = 0.05, and = 0.01 from the Q distribution are provided
by Frees’ test because T ≤ 30. With at least = 0.01, the Frees’ statistic is greater than the
threshold value. Hence, we conclude that CD does not exist among the variables. This
suggests that a shock at one of the sampled companies will not spill over to the others.

4.3. Stationarity Test

To reduce the spurious regression issue, it is essential to look into the normality of
panel data and the order of integration. Adhering to the LLC test, as shown by Levin [45],
we used the traditional method to determine if our data set was static at level or difference.
Table 5 reports the outcomes of the examinations.
Sustainability 2023, 15, 13385 9 of 14

Table 5. Unit root test (LLC).

Variables Adj. t-Statistics

ESG −10.6055 ***
DF −16.7094 ***
EF −35.2533 ***
OC −2.6561 ***
FSIZ −6.4052 ***
FAGE −13.5031 ***
PRO −31.8499 ***
Significant at 1% ***.

The outcome of the unit root test conducted on the variables used is shown in Table 5.
The findings of the LLC test indicate that all the used variables are stationary at their
current levels. The Adj. t-statistics for all variables are noteworthy at the 1% level. This
implies that all variables are stationary at level I. Hence, further analysis to examine the
nature of the relationship can be established.

4.4. Estimation Analysis

To examine the impact of capital structure on the ESG performance of manufacturing
firms in China, the authors utilized the Fixed Effect (FE) and the Fully Modified Ordinary
Least Square (FMOLS) estimation techniques. The FE estimator addresses unobserved
heterogeneity in inclination coefficients within group-specific intercepts. The FE estimator
also removes all time-invariant and unknown heterogeneity by measuring group-specific
intercepts. The FMOLS is advantageous because it can handle endogeneity issues, leading
to solid robustness evaluations even with little data. The FMOLS estimators may be used if
cointegration is established. FMOLS manages heterogeneous cointegration, while endo-
geneity bias and autocorrelation are corrected using a heterogeneous FMOLS estimator [43].
In this study, FE is the primary estimator, and FMOLS is the robustness estimator. We used
stepwise regression analysis by utilizing three panels. In Panel A, we examined the impact
of debt funding on ESG performance. We explored the connection between equity funding
and ESG performance in panel B. We examined the impact of both debt and equity funding
on ESG performance in panel C. We used FE in R1 and FMOLS in R2. We used the natural
logarithm of the variables for the analysis since all the data were not in a common unit of
measurement. Table 6 shows the results of the direct relationship between capital structure
and ESG performance.

Table 6. Estimation results.

PANEL A PANEL B PANEL C

Variables
R1 R2 R1 R2 R1 R2
LNDF 0.0806 ** 0.2912 ** 0.0845 * 0.1934 **
LNEF −0.4929 ** −0.7267 * −0.4927 −0.7158
LNFSIZ 0.2306 0.0101 *** 0.5931 * 0.2906 *** 0.5494 * 0.6106 ***
LNFAGE 0.3539 * 0.0847 *** 0.0514 *** 0.0947 ** 0.4811 *** 0.1162
LNPRO −0.0731 −0.1232 0.1056 * 0.1837 *** 0.1129 * 0.1674 ***
Adj. R squared 0.6211 0.7102 0.5398 0.7016 0.8121 0.8653
F Statistics 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Obs 1561 1561 1561 1561 1561 1561
Significant at 10% *, 5% **, and 1% ***.

From the result of Table 6, the adjusted R-squared revealed high values for all the pan-
els, indicating how well the model fits the empirical analysis. Additionally, the significant
F-statistics values for all the panels further affirm the model’s fitness. Therefore, the models
adequately account for more than half of the disparity in the independent variables’ effects
Sustainability 2023, 15, 13385 10 of 14

on the dependent factor. As a result, multiple regression analysis is possible because it is

believed that the empirical model’s regression effect is appropriate.
From the analysis in Table 6, debt funding and ESG performance showed a 5% statisti-
cally significant and positive association in panel A for both R1 and R2. The implication is
that when the debt funding goes up by one percent, the sustainability performance goes up
by 0.0806 and 0.2912, respectively, for R1 and R2 in panel A. Again, debt funding revealed a
positive connection with ESG performance at a 10% and 5% significance level when all the
variables are considered in Panel C. This indicates that a 1% increase in debt funding will lead
to 0.0806 and 0.2912 increases in ESG performance. Therefore, the first hypothesis is accepted.
In Table 6, the direct relationship analysis results revealed a negative and statistically
significant association between equity funding and ESG performance in panel B, consider-
ing both the primary estimator (R1) and the robustness estimator (R2). This indicates that
a 1% rise in equity funding will lead to 0.4929 and 0.7268 decreases in ESG performance
for R1 and R2, respectively. However, in panel C, an inverse but insignificant link was
found between equity funding and ESG performance for R1 and R2. This implies that a 1%
increase in debt funding will lead to a 0.4927 and 0.7158 decrease in ESG achievement, re-
spectively. However, this link is not statistically significant. Due to the conflicting outcomes
from different panels, an inconclusive conclusion was reached.
Corporate governance mechanisms alone do not entirely determine the level of sus-
tainability performance, as in prior studies [2], as the company’s financial and capital
structure decisions also play a role. Research by Grabinska [9] shows that debt funding
boosts sustainability disclosure. Hence, businesses increasingly turn to debt finance rather
than equity to achieve their financial and non-financial objectives. Based on this back-
ground, the study assumed a positive link between debt financing and ESG performance.
A statistically significant positive link between debt funding and ESG performance was
found in the research. Hence, our first hypothesis is accepted. This finding is consistent
with the result byAmosh [10], which claimed that long-term and short-term debt have a
substantial positive relationship with sustainability. Therefore, a company’s ESG perfor-
mance is enhanced by using high-debt funding. Again, the study’s findings imply that the
sampled manufacturing companies in China prefer debt funding to equity funding as the
best strategy for accomplishing their ESG objectives. This is because firms that disclose ESG
information enjoy higher credit ratings, enabling them to borrow from financial institutions
easily. However, our findings are inconsistent with the results by Bae [31], who argued that,
since ESG is capital intensive, the funding source does not impact firms’ ESG performance.
ESG performance is essential to stakeholders, including investors who favor investing
in businesses with substantial social and ecological duties and clients who consider a
company’s performance before doing business with the firm [46]. However, shareholders
invest more equity capital to improve economic performance and attract investors. Hence,
little attention is given to equity funding to improve ESG performance. Based on that, the
authors assumed a negative link between equity funding and ESG performance. From the
findings, a negative but insignificant relationship between equity funding and a company’s
ESG performance was scientifically proven in panel C. The findings suggest that equity
funding does not impact the sustainability performance of manufacturing firms in China.
Thus, if a firm decides to fund itself through shareholders’ equity, the interests of the
new owners will take precedence over those of other stockholders. However, in panel
B, a negative and significant link was established between the two. Hence, the findings
were inconsistent with those of the two panels. Hence, we fail to accept or reject the
second hypothesis.

4.5. The Moderating Role of Ownership Concentration Analysis

The moderating analysis conducted in this study utilized the moderating effect of owner-
ship concentration (OC) on the relationship between capital structure and ESG performance.
We used stepwise regression analysis by utilizing three panels. In Panel A, we examined the
impact of debt funding on ESG performance. We explored the connection between equity
Sustainability 2023, 15, 13385 11 of 14

funding and ESG performance in panel B. We discussed both debt and equity funding on ESG
performance in panel C. We used FE in R1 and FMOLS in R2. Table 7 shows the moderating
role of ownership concentration on capital structure and ESG performance.

Table 7. The moderating analysis.

PANEL A PANEL B PANEL C

Variables
R1 R2 R1 R2 R1 R2
LNDFOC 0.5602 ** 0.6599 ** 0.7509 *** 0.8578 *
LNEFOC −1.4845 −1.8301 *** 2.7555 * −1.9196 *
LNFSIZ 0.6342 0.4706 1.0307 −2.0106 ** 1.0322 ** 2.1932 **
LNFAGE 0.3721 *** 0.1012 1.4594 *** 3.9006 1.4357 *** −1.3008 *
LNPRO −0.7740 −0.5619 −0.4825 −0.2663 * −0.5558 −0.9841
Adj. R squared 0.6224 0.6932 0.6406 0.7118 0.8383 0.8638
F-statistics 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Obs 1561 1561 1561 1561 1561 1561
Significant at 10% *, 5% **, and 1% ***.

Table 7 outcome showed that all of the panels’ adjusted R-squared values were high,
demonstrating how well the model matched the empirical analysis. Additionally, the
statistically significant F-statistics further affirm the model’s fitness. As a result, the models
satisfactorily explain more than half of the variation in the effects of the independent
variables on the dependent factor.
Tables 6 and 7 results revealed a positive and statistically significant connection
between debt funding and ESG performance in panels A and C for R1 and R2. This
implies that a percentage increase in DFOC by manufacturing firms in China will lead
to a rise in the level of ESG performance of the firms by 0.5602 and 0.6599 in R1 and
R2, respectively, of panel A. Similarly, in panel C, a percentage change in DFOC will
result in an increase of 0.7509 and 0.8578 in the level of ESG performance for R1 and R2,
respectively. The positive relationship was found to be statistically significant. Hence, we
fail to reject hypothesis 3. Our findings are consistent with Kapil [35], who contended that
companies with concentrated ownership may be more committed to sustainable practices
when using debt financing since there may be a closer connection between owners’ interests
and sustainability aims. However, our findings contradict the findings by Su [33], who
argued that businesses may ignore sustainability factors while using debt to increase
shareholder wealth.
Lastly, equity funding saw different results when we added the moderating role of
ownership concentration in Table 7. In panel B, a negative but insignificant link was
established using the primary estimator, whereas using the robustness estimator, an inverse
and significant association was found between equity funding and ESG performance.
When all the study variables were included in the regression analysis in panel C, a positive
and significant impact was recorded between equity funding and ESG performance in
R1, while in R2, a negative and significant connection was found between the two. The
findings suggest a mixed conclusion after introducing the moderating role of ownership
concentration, leading to an inconclusive conclusion for the last hypothesis.

5. Conclusions and Policy Implication

There is a need for businesses to incorporate social and environmental considerations
into their core business strategies. This will show how business operations affect stakehold-
ers and the society in which they operate. The ability of firms to manage their long-term
sustainability depends on their capital structure. However, little attention has been paid
to the link between CS and ESG performance. Most studies on capital structure have
focused on CS and financial performance. Additionally, the influencing role of ownership
structure is often left out in financing decisions of earlier studies. This study consequently
addressed this significant gap in the literature by examining the impact of CS on the ESG
Sustainability 2023, 15, 13385 12 of 14

performance of manufacturing firms in China, taking into account the moderating role of
ownership concentration.
The study relied on secondary data from CSMAR, financial statements, and the annual
reports of the sampled manufacturing firm. Purposive sampling was used to select firms
with readily available data in the CSMAR database from 2016 to 2022. The final data
extracted was made up of 138 firms from the Shanghai Stock Exchange and 85 firms from
the Shenzhen Stock Exchange, making 223 listed manufacturing firms. We utilized the FE
and FMOLS estimation strategies for the empirical analysis. The estimation techniques
confirmed a substantial positive link between debt funding and corporate ESG performance.
However, inconsistent results were found between equity financing and ESG performance.
Moreover, ownership structure was found to have a moderating influence on debt funding
and ESG performance.
Based on the findings, companies’ managers are advised to rely on debt funding rather
than equity funding to enhance their ESG performance because debt funding positively
impacts ESG activities, which may ultimately be advantageous to the company over the
long term. On the other side, managers of firms should cut down on equity funding because
it obstructs ESG performance for manufacturing firms.
Regarding policy implications, by incorporating ESG metrics, the study compre-
hensively evaluates a firm’s sustainability performance beyond conventional financial
indicators. This novel approach enables a more comprehensive understanding of how
financing choices influence a firm’s sustainability profile. Concerning the practical impli-
cations, the findings provide management with more insights regarding which financing
choice strongly influences a firm’s sustainability. Hence, management should use debt
funding for their business operations since it ensures higher sustainability performance.
This, in the long term, will contribute to the Chinese dream of carbon neutrality.
The study has three limitations. First, because there is no uniform and consistent
method for evaluating ESG performance in China, the study proposed an ESG index based
on earlier literature and industry requirements. The index scoring system is entirely arbi-
trary. Hence, it might not be comprehensive because of the selection of factors utilized to
calculate the index. Therefore, future research can consider creating a complete index to
evaluate ESG performance for firms. Additionally, the study focused on capital structure
and ESG. The study did not include other variables that may also influence ESG perfor-
mance. Future studies can consider elaborating on other factors, including capital structure,
to examine their impact on ESG performance. Lastly, the study’s sample consisted solely of
manufacturing companies listed in China. Some businesses were not taken into account. A
varied link between CS and ESG performance may result from considering all sectors of
industries. In a similar vein, not all of the companies were chosen due to data availability.
Future studies with available data can incorporate both listed and unlisted firms in their
empirical analysis.

Author Contributions: Conceptualization, K.W., A.A., N.A. and I.S.; methodology, K.W., A.A., N.A.
and I.S.; data curation, A.A.; writing—original draft preparation, K.W., A.A., N.A., I.S. and A.O.;
formal analysis, I.S..; writing—review and editing, K.W., A.A., N.A., I.S. and A.O. All authors have
read and agreed to the published version of the manuscript.
Funding: This research was funded by Scientific Research Project of Ningxia Education Department,
Ningxia, China: NYG2022078; Princess Nourah bint Abdulrahman University Researchers Support-
ing Project number: (PNURSP2023R391), Princess Nourah bint Abdulrahman University, Riyadh,
Saudi Arabia.
Data Availability Statement: Data were extracted from the CSMAR database, and the sample listed
the manufacturing firm’s annual reports and financial statements.
Acknowledgments: Princess Nourah bint Abdulrahman University Reserchers supporting Project
(PNURSP2023R391), Princess Nourah bint Abdulrahman University, Riyadh, Saudi Arabia.
Conflicts of Interest: The authors declare no conflict of interest.
Sustainability 2023, 15, 13385 13 of 14

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