The Impact of ESG Practices on the Valuation of Related Party M&A Assets: The Moderating Role of Digital Economy

Abstract

The overvaluation of merger and acquisition (M&A) assets can lead to a decline in the performance of listed firms, an increase in the risk of goodwill impairment, and harm to the rights of minority shareholders, as well as to the sustainable development of firms. Based on stakeholder theory, this article constructs models to examine the impact of environmental, social, and governance (ESG) practices on the valuation of related party M&A assets and conducts an empirical analysis. We find that ESG practices significantly inhibit the overvaluation of related party M&A assets, and the digital economy can enhance this negative relationship. Mechanism analysis shows that this negative relationship is mediated through setting up stock performance compensation, reducing performance commitment growth rate, selecting reputable asset appraisal institutions and financial advisors, increasing analyst following and social media discussions, and reducing agency costs. Heterogeneity analysis shows that the inhibitory effect of ESG practices on the overvaluation of related party M&A assets is more obvious in non-horizontal M&A and non-state-owned enterprises. Furthermore, ESG practices can alleviate the stock price crash risk by reducing the overvaluation of related party M&A assets. The research conclusions provide a reference for ESG practices to better serve M&A activities and alleviate asset overvaluation in the digital economy era.

1. Introduction

In recent years, global extreme weather, public health crises, wealth inequality, and other critical issues have become increasingly common, and sustainable development has gradually emerged as an important concern globally. The United Nations Principles for Responsible Investment (PRI) stands as the foremost ESG initiative in global asset management [1]. As of 2024, there are more than 5300 institutions worldwide that are signatories to the (PRI) and are managing assets exceeding $128 trillion. According to the latest report from the Global Sustainable Investment Alliance (GSIA), the total global sustainable investments are expected to exceed $40 trillion by 2030 [2]. This indicates that global investors are increasingly prioritizing responsible investment. Governments and regulatory agencies worldwide, for example, the European Union’s Sustainable Financial Disclosure Regulation and the China Securities Regulatory Commission’s ESG Information Disclosure Guidelines for Listed Firms are gradually increasing policy support for ESG. A growing number of Chinese firms are actively releasing ESG reports. ESG practices are gradually becoming an important indicator for stakeholders to assess a firm’s sustainable development capabilities. Simultaneously, ESG practices also influence major investment and financing decisions. Unilever, with good ESG practices, accurately assessed the intangible asset value of Ben & Jerry’s during the M&A. The reasonable valuation maximized the synergies. In contrast, American International Group (AIG), with poor ESG practices, lacked an effective risk assessment system when acquiring International Lease Finance Corporation (ILFC). It overly focused on ILFC’s short-term leasing revenue while overlooking its own integration limitations. Overestimating ILFC’s value ultimately led the firm to financial distress. Clearly, M&A asset valuation impacts on the interests of all stakeholders and the firm’s sustainable development. Therefore, whether ESG practices can help mitigate the risk of asset overvaluation is an important issue worth exploring.

M&A is an important strategy for promoting industrial restructuring, leveraging synergies, and optimizing market resource allocation, with significant implications for the sustainable development of enterprises. In emerging markets characterized by relatively weak protection for investors and highly concentrated ownership, listed firms often engage in mergers and reorganization through self-interested target selection, premium payments, and related party transactions. These activities can trigger risks such as the collapse of target performance in the post-commitment period, reduction in relevant party holdings, crashing stock price, or impaired goodwill [3,4]. Objective and fair asset valuation is critical for reducing the above M&A risks and improving synergies. The value of an asset is determined by the present value of its future cash flows. However, the present value of the future cash flows of acquired assets is often influenced by stakeholders within the acquiring party, especially the controlling shareholders and managers. When major shareholders participate as trading parties in M&A, they are motivated to use their influence on the listed company to violate the principles of open market transactions and increase the present value of the asset’s future cash flows, leading to a high M&A premium [4]. Therefore, there is an increased possibility of major shareholders manipulating the results of asset valuation in related party M&A, and the problem of asset overvaluation is more prominent. Due to the limitations of the traditional corporate governance framework, stakeholders find it difficult to actively participate in M&A decision-making and rights protection, and the issue of controlling shareholders manipulating asset valuation has long remained unresolved. However, the rapid development of ESG practices has integrated more stakeholders into the management strategy framework, providing a new approach under the perspective of “corporate social responsibility” to address the problem of controlling shareholders transferring benefits. The stakeholder expense view maintains that good ESG practices not only enhance the attractiveness of the target company but they can also reduce risks and improve the efficiency of integration during the M&A process [5,6]. However, according to the shareholder expense view, the motivation behind managers’ active engagement in corporate social responsibility (CSR) activities is to establish a good reputation for their personal gain [7]. The agency problem of company acquisition can distort the asset valuation of the target company, leading to huge acquisition premiums [8]. In addition, firms may actively engage in CSR to cover up the collusion between controlling shareholders and the management, which infringes on the rights and interests of minority shareholders.

The two opposing views noted above highlight the need to establish whether ESG practices play a governance role in valuation manipulation behavior or whether it enhances internal tunneling. Considering that fair asset valuation results have high requirements for financial service intermediaries, performance commitment clauses, target asset information, and internal governance quality of acquiring company, it is not yet clear how ESG practices play a positive or negative role in these aspects. Furthermore, the digital economy is also an important driving force for enterprise resource allocation and sustainable development. First, from the perspective of how digitalization promotes ESG practices, the digital economy breaks the traditional divide between economic interests and social responsibility by actively linking and constructing digital communities or digital micro-societies based on collectivism. These digital communities emphasize community-based social order, collective well-being, and the welfare of others, thereby strengthening corporate social responsibility performance [9,10]. Second, from the perspective of how digitalization mitigates controlling shareholders’ benefit tunneling, digital technologies such as big data, artificial intelligence, and blockchain enhance stakeholders’ access to information and analytical capabilities. They also enable minority shareholders to vote in shareholder meetings online and allow a broader range of stakeholders to participate in corporate governance through official platforms [11], increasing the cost of valuation manipulation. Therefore, the changing relationship between ESG practices and asset valuation under the influence of digital economic empowerment has become a significant practical issue worth exploring. Based on the above analysis, this paper aims to address the following key questions: (1) Can ESG practices help mitigate the overvaluation of related party M&A assets? If so, through which mechanisms? (2) Does the digital economy positively influence the relationship between ESG practices and the overvaluation of related party M&A assets? The study that addresses these issues is critical for alleviating the asset valuation foam and maintaining sustainable development of the capital market.

The contributions of this paper are as follows. First, it adds to research on the factors affecting the valuation of M&A assets. The literature has largely focused on the differences in asset valuation outcomes considered from the perspectives of evaluation methods, asset appraisers, and the fair opinions of investment advisors. These influencing factors may simply be ways for major shareholders to manipulate asset valuation. Starting with the business philosophy of M&A enterprises, we explore the behavior of major shareholders’ interest transfer within the framework of ESG practices, which fundamentally curbs the motivation and ability of major shareholders to manipulate asset valuation and standardizes the pricing of related party transactions. Next, we review the research literature on the economic consequences and governance mechanisms of ESG practices. Until now, most studies have examined the impacts of ESG practices on the value, performance, financing constraints, firm risk, green innovation, and corporate fraud of firms. We extend the study of the economic effects of ESG from the perspective of related party M&A, thus providing a theoretical basis for enterprise ESG practice and asset evaluation. Furthermore, we clarify the governance path of ESG practices on asset overvaluation from the perspectives of performance commitment, intermediaries’ reputations, information dissemination, and agency cost. Third, we augment research on the impact of the digital economy, which has largely focused on macro perspectives, such as industrial structures and economic levels, by assessing its corrective effect on asset valuation. Thus, our study fills a gap at the micro level, especially enterprises’ M&A decision-making by examining the moderating effect of the digital economy on the relationship between ESG practices and the valuation of related party M&A assets. In light of our findings, we provide recommendations for regulating major shareholders’ behavior relating to interest transfer from a macro perspective.

2. Literature and Hypothesis Development

2.1. Literature Review

2.1.1. ESG Practices

There is still no consensus on the impact of ESG practices on firms’ daily operations and market performance. Some studies, based on the theories of competitive advantage and creating shared value, suggest that ESG practices can enhance a company’s long-term value by helping it create a comparative advantage, such as improving corporate performance [12], alleviating underinvestment [13], promoting green innovation [14], increasing corporate asset size [15], and reducing corporate risk and fraudulence [16,17,18,19]. However, some studies based on agency theory suggest that ESG practices may be driven by managers’ motives to enhance personal reputation, expand social networks, or self-interested risk preferences. This could lead firms to overinvest in the areas of environmental protection and social responsibility, negatively impacting shareholder wealth. For example, ESG investments may consume resources intended for production and R&D, which could hinder corporate value growth [20]. In addition, ESG practices may amplify the impact of negative news on operational risks, harming corporate value and customer reputation, ultimately leading to a decline in stock prices [21]. In summary, there is no unified conclusion regarding the positive or negative impact of ESG on daily operations and market performance. However, mainstream perspectives increasingly recognize ESG practices as a source of long-term corporate value creation.

Research on the impact of ESG practices on corporate M&A behavior mainly includes aspects such as M&A performance, goodwill impairment, payment methods, premiums, and M&A uncertainty. The economic consequences of ESG practices on M&A can be both positive and negative. Most studies indicate that ESG practices have a positive impact on M&A. Whether from its individual dimensions (environmental, social, or governance) or as a whole, strong ESG practices reduce information asymmetry between the target company and the acquirer as well as managerial agency issues. It also leads to increased support for the investment and operational activities of the merged enterprise and to significant improvements in M&A performance [22,23]. Subsequently, numerous scholars have discussed the impact of ESG on M&A performance and its mechanisms. Good ESG practices enhance a company’s public image and effectively mitigate the uncertainty risks in M&A, thereby increasing the firm’s value [24]. Acquirers with good ESG practices can optimize resource allocation and organizational coordination, reducing talent loss in the acquired company and maximizing investment value [25]. Qiao et al. (2018) proposed that the social responsibility activities of M&A companies mainly play a positive role in M&A performance through spillover and learning effects [26]. Especially in cases of related party M&A, the acquirer’s demonstrated social responsibility reduces resource expropriation by controlling shareholders, promotes knowledge sharing and information communication, and improves the long-term performance of M&A [26]. Many scholars have enriched M&A practice research using data from different countries and regions. Tampakoudis and Anagnostopoulou (2020), based on European M&A cases, found that the ESG practices gap between acquiring and target firms affects overall M&A performance [27]. When the target firm has better ESG practices than the acquiring firm, it significantly increases the long-term market value. Deng et al. (2013), using U.S. M&A cases, discovered that firms with high corporate social responsibility (CSR) achieve higher M&A announcement returns and better M&A performance while significantly shortening deal completion time and reducing the likelihood of M&A failure [28]. Zhang et al. (2022), analyzing data from 23 global economies, found that corporate social responsibility has an insurance effect [29]. High-CSR acquirers generally experience positive short-term cumulative abnormal returns upon announcing an acquisition but may face negative returns in hostile takeovers [29]. Additionally, the possibility of violating implicit contracts and the uncertainty of completing M&A are reduced when the acquirer has a good reputation, demonstrates high levels of corporate responsibility, and values the rights and interests of stakeholders [5]. However, some studies suggest that ESG practices may also have a negative impact on M&A. The high CSR of the acquirer may be driven by motives relating to managerial agency and stock payments, which lead to an increased risk for the target company after the merger. The target company prefers cash payments [30]. Hussaini et al. (2021) also found that CSR activities are an outcome of agency problems, proposing that companies with high CSR performance are more likely to accept non-value-maximizing investments by managers, thereby increasing the premium for corporate M&A [8]. Third, studies have shown that ESG practices can provide stakeholders with incremental information, but this may also squeeze M&A resources. Their impact on goodwill hinges on achieving a balance between these two impacts [31]. In summary, there are the following research gaps: First, there is extensive research on the impact of ESG practices on M&A performance and M&A risks (such as goodwill impairment, M&A uncertainty, and M&A pricing). However, there is a lack of studies on their influence on M&A asset valuation. Second, the mechanisms between ESG practices and M&A behavior are mainly focusing on issues like information asymmetry and agency cost, without addressing the unique characteristics of M&A behavior (such as financial intermediaries and performance commitment). The absence of these critical pathways makes the mechanism discussion lack specificity and completeness.

2.1.2. Asset Valuation

Research on asset valuation has focused on aspects such as the acquirer’s control rights, asset appraisers, and investment advisors. First, the vast majority of studies suggest that agency problems within the acquiring firm are a key reason for M&A premiums and asset overvaluation [8,32]. Acquiring firms obtain control by overvaluing the target assets. In this context, managers inflate valuations to expand the firm’s size and build a business empire, thus establishing their irreplaceable management control [33]. Controlling shareholders, through characteristics such as the separation of ownership and control, pyramid structures, and excessive delegation of directors, increase the valuation of related party M&A asset to transfer benefits to themselves [34]. Second, many studies have discussed the impact of asset appraisers on the results of asset valuation. Klamer et al. (2017) proposed that asset valuation bias mainly stems from the intrapersonal and interpersonal judgment biases of asset appraisers [35]. Intrapersonal judgment bias usually results from the limited access of asset appraisers to asset-related information. Consequently, they have to rely on past asset valuations or resale prices as reference material. These information sources can lead to judgment bias in value decisions. Interpersonal judgment bias is associated with the agency relationship between asset appraisers and clients in which appraisers sacrifice independence to maintain long-term business relationships and cater to clients’ unreasonable valuation needs [36,37]. Third, some studies have discussed the impact of the fair opinions of investment advisers (typically investment banks) on the valuation of M&A assets. On the one hand, to assist target company shareholders negotiating higher quotes, investment banks strategically choose peers with higher valuation multiples as comparable companies and obtain higher consulting fees after the transaction is completed [38]. On the other hand, to reduce the litigation risks associated with the target company’s M&A and promote the successful completion of M&A, investment banks will lower the asset valuation. Especially in M&A contexts involving significant agency-related conflict between managers and external shareholders, this “litigation-driven” valuation reduction is more pronounced [39]. There is also a strand of the literature that discusses the impact of the characteristics of M&A targets on asset valuation, indicating that information uncertainty in the target company can enhance the acquirer’s bargaining power in negotiations, thereby reducing the target company’s valuation multiple [40]. In summary, there are the following research gaps: Existing research discusses how managers and controlling shareholders manipulate valuations through management and governance control within the traditional internal governance framework, but it does not propose methods to reduce asset overvaluation. Asset appraisers and investment advisors are chosen by the firm and are not completely exogenous. They are influenced by the company’s internal governance, which may hinder the effective regulation of asset appraisal practices. Therefore, under the traditional governance framework mentioned above, the issue of related party M&A asset overvaluation has not been addressed.

2.1.3. Research Gaps

First, research on the economic consequences of ESG practices has developed two opposing viewpoints based on competitive advantage theory, shared value creation theory, and agency theory. These viewpoints need further validation in the context of China’s M&A valuation market. Second, research on the influencing factors of M&A asset valuation has revealed that agency problems are a significant cause of asset overvaluation, but the issue of valuation manipulation remains unresolved within the traditional governance framework. This calls for incorporating the digital economy context, bringing more stakeholders into the corporate governance framework, and exploring the impact and mechanisms of corporate ESG practices on related party M&A asset valuation from a digital economy perspective. Third, research on the mechanisms of ESG practices’ impact on M&A behavior lacks specificity. In addition to information and agency cost channels, the unique influence channels of M&A behavior still need to be considered.

2.2. Hypothesis Development

2.2.1. Basic Hypothesis

Most listed firms in China have adopted a “spin-off” listing model of divesting a portion of the core assets of the parent firm for listing. This has led to a higher incidence of acquisition of unlisted assets by listed firms from their parent firms and related parties, demonstrating clear characteristics of related party M&A, which is an important strategy enabling controlling shareholders to transfer benefits [41]. According to the asset pricing theory, the value of an asset is determined by the present value of its future cash flows. However, in reality, the controlling shareholders increase the valuation of the target asset in a covert way by overestimating the future cash flows of the asset, so as to obtain excess returns on control rights. We argue that ESG practices can reduce the overvaluation behavior of controlling shareholders in the following ways. Based on risk assessment theory, reputation theory, information asymmetry theory, and agency cost theory, we analyze the impact of ESG practices on the valuation of related party M&A assets through four key mechanisms: reducing performance commitment risk, selecting reputable financial intermediaries, promoting information dissemination, and mitigating agency problems. Therefore, we first propose the main hypothesis about “whether corporate ESG practices affect the valuation of related party M&A assets”, and then propose secondary hypotheses based on four different mechanisms. Specifically, ESG practices can reduce the overvaluation of related party M&A assets through the following four aspects:

Based on risk assessment theory, ESG practices can reduce the risks of performance commitment. The performance commitment applied in China is similar to the earnout provisions used in Europe and America, both of which are essentially used to adjust transaction valuations [42]. First, for the acquiring firm, good ESG practices imply a more robust risk management capability. This not only enables the acquiring party to more accurately assess various potential risks of the target assets, such as environmental compliance risks and employee relations risks, but also effectively manages the opportunistic risks of the controlling shareholders and the managers. This risk management capability makes the acquiring party approach the performance commitment clauses more cautiously, and then reasonably adjust the asset valuation. Excessive performance commitment is used by insiders as a speculative tool, which can lead to overvaluation [43]. Compared with the low default cost of cash compensation, stock compensation increases the risk of control transfer for controlling shareholders and their affiliates [44] and can effectively reduce insiders’ motivation to tunnel. Therefore, the acquirer tends to adopt moderate performance commitment growth rates and stock performance commitment to minimize the risk of asset overvaluation. Second, for the acquired firm, good ESG practices reduce the transaction costs and expected risks associated with signing performance commitment. Performance commitment converts a one-time transaction into a continuous long-term transaction. The acquired party is incentivized to add the cost of expected risks during this period to the asset valuation. Companies with good ESG practices have the ability to assist the acquired party in achieving reasonable performance commitment, reducing transaction costs and expected risks and alleviating the acquired party’s motivation to engage in asset overvaluation. Thus, ESG practices reduce the overvaluation of related party M&A assets through the performance commitment mechanism.

Based on reputation theory, ESG practices make companies more inclined to favor financial intermediaries with good reputations. Firms with good ESG practices integrate sustainable strategies into their corporate strategy and daily operations while placing greater emphasis on maintaining public trust and a good reputation [45]. The vast majority of investors in the capital market have inherent biases toward related party M&A, believing that such transactions lack transparency and are likely to involve the transfer of interests from major shareholders [46,47]. This poses a significant reputational risk for the firm. To minimize the negative impact of related party M&A, the firm will prioritize the involvement of reputable financial intermediaries. Financial advisors and asset appraisal institutions are important financial intermediaries involved in M&A [48]. Highly acclaimed asset appraisal institutions and financial advisors typically have more professional and comprehensive evaluation systems. They invest more resources in uncovering comprehensive asset information, including financial data, environmental compliance information, and social responsibility details. Additionally, they strictly adhere to evaluation standards and regulations, avoiding collusion with acquirers for short-term gains [49], thereby reducing the probability of overvaluing assets. Thus, ESG practices reduce the overvaluation of related party M&A assets through the intermediary reputation mechanism.

Based on the information asymmetry theory, ESG practices can promote information dissemination. Many related party M&A occur in an environment of imperfect public competition, which enhances the information asymmetry within and outside the acquiring company, leading to the misappropriation of interests by insiders toward minority shareholders. The amount of supplementary information beyond financial performance reports that the company provides to external parties corresponds to the level of its ESG practices, with high-performing companies providing more information [50]. Increased access to information sources makes it easier for minority shareholders to engage in discussions on social media. Interactive discussions generate insights within a wider group, which increase the likelihood of minority shareholders identifying irrational valuation behaviors [51]. Good ESG practices can also attract analysts’ ratings and annotations [52], thereby enhancing the depth and breadth of information available to firms in the capital market, while reducing information asymmetry between minority shareholders and target asset and improving the fairness of valuations for firms. Thus, ESG practices reduce the overvaluation of related party M&A assets through the information dissemination mechanism.

Based on agency cost theory, ESG practices can reduce agency problems. The concentration of equity in emerging markets is high, and agency problems arise between shareholders and managers as well as between controlling shareholders and minority shareholders [53]. Especially in related party M&A, there may be cross interactions (collusion between controlling shareholders and managers) relating to the above two types of agency problems. First, ESG practices establish a higher quality of corporate governance and a more comprehensive regulatory system, enhancing stakeholders’ supervisory capabilities. Second, ESG practices encourage controlling shareholders and managers to adopt a long-term value-oriented mindset, aligning the company’s sustainable development with the interests of all shareholders rather than merely pursuing short-term personal gains. Consequently, the sound governance mechanisms and sustainable philosophy brought by ESG practices reduce the motivation and ability of managers and controlling shareholders to transfer benefits individually or in collusion, thereby reducing the probability of overvaluing assets. Thus, ESG practices reduce the overvaluation of related party M&A assets through the agency cost mechanism.

Based on the four impact pathways of performance commitments, intermediary reputation, information dissemination, and agency cost, we argue that ESG practices can significantly reduce the overvaluation of assets in related party M&A. Therefore, we propose the following main hypothesis and secondary hypotheses:

H1: 

ESG practices will lower the overvaluation of related party M&A assets.

H1a: 

ESG practices will lower the overvaluation of related party M&A assets by reducing performance commitment risks.

H1b: 

ESG practices will lower the overvaluation of related party M&A assets by selecting reputable financial intermediaries.

H1c: 

ESG practices will lower the overvaluation of related party M&A assets by promoting information dissemination.

H1d: 

ESG practices will lower the overvaluation of related party M&A assets by alleviating agency problems.

As a “soft constraint”, ESG practices provide a conducive stakeholder environment for asset valuation, while the digital economy, conceived as a “hard support”, strengthens the governance role of ESG practices on asset valuation foam in the following ways. The digital economy mainly influences the relationship between ESG practices and the overvaluation of assets in related party M&A from four aspects: optimizing information disclosure, optimizing market supervision, optimizing resource allocation, and optimizing M&A decisions. Firstly, from the perspective of optimizing information disclosure, based on the theory of information asymmetry, the digital economy has increased the quantity and quality of disclosure information. Although fulfilling ESG responsibilities prompts firms to increase the level of their information disclosure, the quality of disclosed information varies and includes some false information. For example, some firms transmit false positive signals to the outside world to cater to the preferences of stakeholders. Regions with a more advanced digital economy place greater emphasis on ESG practices [54], which can better ensure the authenticity and value of disclosed information. Based on more comprehensive and accurate information, the acquired party can reasonably assess the risks and returns of asset integration, thus reducing the requirement for high asset valuation. Second, from the perspective of optimizing market supervision, based on the market supervision and reputation mechanism theory, the digital economy has facilitated wider dissemination of disclosure information with attendant effects on public opinion and improved the market supervision system. Investors collect, screen, and reprocess disclosure information through technologies associated with the digital economy (e.g., the Internet and social media). This helps them to integrate diverse information relating to target assets, such as suppliers, customers, employees, and industry competitors [55], making it easier to identify manipulative behavior in asset valuation. At the same time, the digital economy can generate strong public opinion impacts, increasing the cost of reputation erosion and default. The network attention reflected in Internet traffic amplifies the negative impact of related party M&A tunneling and attracts the attention of analysts, the China Securities Regulatory Commission (CSRC), and investor protection institutions [51] and increases the risk of a stock price crash. Third, from the perspective of optimizing resource allocation, based on the resource-based theory and the industrial cluster theory, the digital economy has promoted the efficient allocation of resources within the region. In regions with a higher level of digital economic development, firms are more likely to attract high-quality resources by virtue of good ESG practices. Moreover, they can accurately identify the complementarities with the acquired parties in terms of resources, technologies, etc., with the help of digital technologies, so as to achieve more efficient collaboration. In addition, the digital economy drives the development of industrial clusters, enabling both the acquiring and the acquired parties to share resources along the upstream and downstream industrial chains, further optimizing resource allocation. All of these reduce the risk expectations of the acquired parties and help alleviate the phenomenon of overvalued assets. Fourth, from the perspective of optimizing M&A decisions, based on the risk assessment and cost–benefit theory, the digital economy helps companies leverage digital technologies to improve the accuracy of asset valuation and the efficiency of M&A integration. On the one hand, digital technologies can more precisely quantify the potential financial and non-financial risks involved in M&A. They can also dynamically monitor the daily operations and performance commitment risks of target assets through pre-acquisition information gathering, as well as information exchange during and after the process, allowing firms to promptly correct evaluation biases. On the other hand, digital technologies use cost forecasting models and benefit assessment methods to accurately predict the cost–benefit of target asset. By considering future integration costs in advance and regulating the level of performance commitment within a reasonable range, they enhance the efficiency and quality of evaluation, thereby reducing the probability of overvaluing assets. We therefore propose the following hypothesis.

H2: 

The more advanced the digital economy, the stronger the inhibitory effect of ESG practices on the overvaluation of related party M&A assets.

2.2.2. Heterogeneity Hypothesis

Different types of M&A affect the relationship between ESG practices and the valuation of related party M&A assets. The synergy effect theory suggests that after M&A, companies can generate greater benefits than when operating independently by integrating resources and optimizing business processes. However, the asset injection by controlling shareholders may either the “propping” or “tunneling” behavior of the listed firm [56]. Horizontal M&A occurs within the same industry chain, while vertical or mixed M&A happens in upstream and downstream industrial chains or in unfamiliar industrial chains. In horizontal M&A, due to high business similarity, controlling shareholders are more likely to inject high-quality asset into the listed company for long-term benefits, aiming for economies of scale and synergistic development [57]. In this case, asset valuation is relatively fairer, and the valuation correction effect of ESG practices is reduced. In non-horizontal M&A, since they involve different industry segments or entirely new business areas, there is a higher degree of information asymmetry between the firms, lower resource utilization efficiency, and greater uncertainty and risks in realizing synergy. This increases the controlling shareholders’ motivation and ability to “tunneling”. Therefore, the possibility of asset overvaluation rises, and the valuation correction effect of ESG practices is enhanced. Therefore, we further propose an extended hypothesis.

H3: 

Compared to horizontal M&A, the effect of ESG practices in reducing the overvaluation of related party M&A assets are more significant in non-horizontal M&A.

Different types of ownership affect the relationship between ESG practices and the valuation of related party M&A assets. Based on political connection theory, state-owned enterprises bear both political and economic dual objectives, face stricter administrative and market regulations, and require multi-level approval from state-owned asset regulatory departments during M&A. Moreover, the controlling shareholders have political identities and do not participate directly in the sharing of surplus profits, and managers prioritize political promotion over stock price returns [58]. This political characteristic and interest orientation ensures the supervision of M&A, which in turn limits the suppressive effect of ESG practices on asset valuation. In contrast, non-state-owned enterprises are more driven by economic interests. To maximize their own benefits, they are more likely to overestimate asset valuation in related party M&A, thereby harming stakeholder interests. Good ESG practices improve the internal governance, strengthen the supervision of related party M&A, and effectively mitigate asset overestimation. Therefore, we further propose an extended hypothesis.

H4: 

Compared to state-owned enterprises, the effect of ESG practices in reducing the overvaluation of related party M&A assets are more significant in non-state-owned enterprises.

3. Data and Empirical Design

3.1. Data

Our sample comprise listed firms in the Shanghai and Shenzhen A-share markets in China between 2010 and 2023, which have acquired the asset of major shareholders or their related parties through share acquisitions. The ESG practices, digital economy, and related financial data of the listed firms were all extracted for the accounting year preceding the M&A event. ESG data were obtained from the Hua Zheng ESG rating of the Wind database, and financial data of listed firms were obtained from the CSMAR database. The digital economy indexes were obtained from the Digital Finance Research Center of Peking University, the annual China Industrial Statistical Yearbook, the China Statistical Yearbook, and provincial statistical yearbooks. The asset valuations were manually calculated from information provided in M&A announcements. We screened the data by deleting financial industry and ST firms and performing 99% winsorization. Ultimately, we obtained a total of 516 observations.

3.2. Variables

3.2.1. Valuation of Related Party M&A Asset

According to the recommendations of the International Valuation Standards Council (IVSC) in the “Guidelines on Related Party Transactions Valuation”, the differential method can serve as an indicator for identifying potential valuation manipulation. We measured the degree of abnormal overvaluation of related party M&A assets by calculating the difference between the asset appraisal appreciation rate disclosed in the asset appraisal report and the median appraisal appreciation rate of a similar target asset in the same industry. Although it is difficult to measure asset value in related party M&A directly using the present value of future cash flows due to factors such as synergies and non-market transactions, the differential method employed in this paper also reflects the idea of the present value of future cash flows. The disclosed asset appraisal appreciation rate in related party M&A is the expectation of the acquiring company for the future cash flows of the asset, which has a certain degree of subjectivity. Given the difficulty of determining the fair value of assets in related party M&A, the median appraisal appreciation rate of a similar target asset in the same industry can, to some extent, represent the market’s expectations of future cash flows. The difference between the two reflects the extent to which the company’s asset pricing aligns with market fair value. According to the rule that the value of an asset is determined by the present value of its future cash flow, if the asset is priced reasonably, then the asset price should be close to the market’s expectation of its future cash flow. And the purpose of the measurement by the differential method is also to make the asset pricing return to a level that matches the present value of the asset’s future cash flow, which is consistent with the goal of the rule. The specific calculation formula was as follows:

Abrev = (asset appraisal value − asset book value)/asset book value − median appraisal appreciation rate of similar M&A assets in the same industry.

3.2.2. ESG Practices

Notable features of the Hua Zheng ESG rating are its proximity to the Chinese market, wide coverage, and a high level of timeliness, which ensure effective measurement of ESG practices. We selected indicators for measuring the Hua Zheng ESG rating. There are nine levels of the Hua Zheng ESG rating. In ascending order, these are C, CC, CCC, B, BB, BBB, A, AA, and AAA. Following the literature [18,54], we used the assignment method to convert the ESG ratings from C to AAA into 1 to 9.

3.2.3. Digital Economy

Following the methodologies of Li et al. (2023) [59], we considered three aspects when evaluating the level of development of the digital economy at the regional level: digital infrastructure, development of the digital industry, and digital financial inclusion and used 13 specific variables.

Table 1. Evaluation system of digital economy.

First-Level Indicator	Second-Level Indicators	Third-Level Indicators	Indicator Attribute
Development level of digital economy	Digital infrastructure	Number of domain names (10,000).	positive
		Number of IPv4 URLs (10,000).	positive
		Number of Internet broadband access ports (10,000).	positive
		Mobile phone penetration rate (units/100 people).	positive
		Cable length per unit area (km/sq km).	positive
	Digital industry development	Number of information-based enterprises.	positive
		Number of websites owned by every 100 enterprises.	positive
		Proportion of enterprises with e-commerce transactions (%).	positive
		E-commerce sales revenue (100 million yuan).	positive
		Software business revenue (100 million yuan).	positive
	Digital financial inclusion	Coverage breadth index.	positive
		Use depth index.	positive
		Digitalization Index.	positive

shows the indicator design. Compared with a subjective assignment method, the entropy method eliminates human interference factors and enables an objective evaluation of the relative importance of various indicators. Therefore, we used the entropy method to calculate the digital economy index at the regional level.

3.2.4. Control Variables

Drawing on the literature [52,55], we select nine variables at the microlevel of enterprises as control variables. These variables were: M&A asset size (Inject), evaluation method (Meth), asset liability ratio (Lev), return on total assets (Roa), equity balance (Balance), independent director ratio (Indep), major shareholder subscription ratio (Buy), enterprise age (Age), and largest shareholder shareholding ratio (Top).

Table 2. Variable definitions.

Variable	Definition
Abrev	(asset appraisal value − asset book value)/asset book value − median appraisal appreciation rate of similar M&A assets in the same industry.
ESG	ESG ratings are transferred from C to AAA into numbers 1 to 9.
Digital	the entropy method, the detailed calculation appears in Appendix A.
Inject	ln (price of M&A assets).
Meth	the income method takes 1, while others take 0.
Lev	total liabilities/total assets.
Roa	net income/total assets.
Balance	sum of shareholding ratios of the second to the fifth largest shareholders/shareholding ratio of the largest shareholder.
Indep	number of independent directors/number of directors on the board.
Buy	number of subscribed shares by major shareholders/the targeted issuance of new shares.
Age	ln (years from the firm establishment).
Top	number of shares held by the largest shareholder/total number of shares.

shows the specific variables and definitions used in this study.

3.3. Model Specification

Following Luo and Xiong (2022) [60], we examine the impact of ESG practices on the valuation of related party M&A asset and the moderating effect of the digital economy, we construct the following model:

$$Abre{v}_{i,t}={\alpha }_0+{\alpha }_1{ESG}_{i,t-1}+{\alpha }_{2}Control{s}_{i,t-1}+Industry+Year+\epsilon ,$$

(1)

$$Abre{v}_{i,t}={\beta }_0+{\beta }_1{ESG}_{i,t-1}+{\beta }_2{Digital}_{i,t-1}+{\beta }_3{{ESG}_{i,t-1}\times Digital}_{i,t-1}+{\beta }_{4}Control{s}_{i,t-1}+Industry+Year+\epsilon ,$$

(2)

where Abrev_i,t represents the degree of overvaluation of related party M&A asset for firm i in year t, ESG_i,t−1 represents the ESG practices for firm i in year t − 1, Digital_i,t−1 represents the level of digital economy development in the location for firm i in year t − 1, α₀ and β₀ are the intercept terms, ε is the error term, and Controls refers to a series of control variables, including Inject, Meth, Lev, Roa, Balance, Indep, Buy, Age, and Top. In addition, we also control Industry and Year.

4. Empirical Results

4.1. Descriptive Statistics

Table 3. Descriptive statistics.

Variable	N	Mean	Std.Dev.	Min.	Median	Max.
Abrev	516	2.769	4.399	−0.001	1.334	50.084
ESG	516	3.917	0.995	1	4	6
Dige	516	0.351	0.268	0.049	0.244	1
Inject	516	12.164	1.291	2.945	12.184	15.892
Meth	516	0.529	0.500	0	1	1
Lev	516	0.472	0.214	0.020	0.469	1.037
Roa	516	0.038	0.061	−0.326	0.033	0.420
Balance	516	0.522	0.570	0.019	0.347	3.646
Indep	516	0.373	0.059	0.273	0.333	0.714
Buy	516	0.504	0.403	0	0.485	1
Age	516	2.435	0.676	0	2.708	3.258
Top	516	0.381	0.149	0.092	0.371	0.788

presents descriptive statistical data for the main variables. The average asset valuation is 2.769, with a maximum value of 50.084 and a standard deviation of 4.399. These results indicate that overvaluation of assets is a common problem in related party M&A and varies widely among companies. The average ESG practices of Chinese companies is 3.917, with a maximum value of 6, indicating that the overall ESG practices of Chinese companies is poor. The descriptive statistics of the remaining variables are consistent with those reported in the literature [52,55].

4.2. Main Regression Results

Table 4. Basic regression and moderating regression.

	(1)	(2)	(3)	(4)
	Abrev	Abrev	Abrev	Abrev
ESG	−1.205 ***	−0.928 ***	−1.325 ***	−1.066 ***
	(−3.747)	(−2.741)	(−4.171)	(−3.154)
Digital		5.707 ***		4.577 ***
		(3.480)		(2.872)
ESG × Digital		−1.229 ***		−1.003 **
		(−3.003)		(−2.520)
Inject			0.180	0.141
			(0.595)	(0.468)
Meth			1.881 ***	1.808 ***
			(2.741)	(2.647)
Lev			−1.996	−2.241
			(−1.170)	(−1.314)
Roa			12.871 **	10.805 *
			(1.995)	(1.678)
Balance			0.718	0.654
			(1.011)	(0.921)
Indep			10.125 *	8.540
			(1.751)	(1.472)
Buy			−1.625 **	−1.474 *
			(−1.980)	(−1.805)
Age			−0.559	−0.503
			(−0.935)	(−0.846)
Top			−3.063	−3.098
			(−1.147)	(−1.156)
Constant	7.921 ***	6.682 ***	4.847	4.855
	(6.115)	(4.980)	(1.111)	(1.119)
Ind/Year	yes	yes	yes	yes
Observations	516	516	516	516
Adj.R2	0.037	0.070	0.128	0.146

Notes: ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

presents the basic regression results for the effects of ESG practices on the valuation of related party M&A asset as well as the regression results for the moderating effects of the digital economy. According to Equation (1), column (1) of Table 4 reports the univariate regression results of ESG practices on the valuation of related party M&A assets. We further control other variables in column (3). In column (1), the ESG practices (ESG) coefficient is −1.205, which is significantly negative at the 1% level. After further controlling for other relevant factors, the coefficient in column (3) is still significantly negative at the 1% level with a coefficient of −1.325. This indicates that ESG practices significantly reduces the valuation of related party M&A assets. Therefore, hypothesis H1 is verified. According to Equation (2), column (2) of Table 4 reports the impact of the interaction term of ESG practices and digital economy (ESG × Digital) on asset valuation (Abrev) without control variables. The interaction coefficient on ESG × Digital is −1.229, which is significant at the 1% level. When we include control variables in column (4), the interaction coefficient on ESG × Digital is −1.003 and significant at the 5% level. These results support H2, indicating that the negative correlation between ESG practices and the valuation of related party M&A assets is stronger in regions with high digital economy development.

4.3. Robustness and Endogeneity Tests

4.3.1. Robustness Tests

(1) Replacing the independent variable: To avoid the misinterpretation of ESG practices caused by differences in ESG disclosure quality among various evaluation agencies, we replaced the Hua Zheng ESG rating with Bloomberg ESG rating. (2) Replacing the dependent variable: The median appreciation rate of assets in the same industry and category cannot fully represent the normal appreciation rate, which may lead to significant errors in the measurement of abnormal growth rates (Abrev). We measured the degree of asset overvaluation according to the asset appraisal appreciation rate (Rev) disclosed in the asset appraisal report. (3) Using a lagged independent variable: Considering that the ESG practices of a company may have a lagged impact on the valuation of related party M&A asset, we examined the impact of one-period lag for ESG on the valuation of related party M&A asset.

Table 5. Robustness tests.

	Replace Independent Variable		Replace Dependent Variable		Lagged Independent Variable
	(1)	(2)	(3)	(4)	(5)	(6)
	Rev	Rev	Abrev	Abrev	Abrev	Abrev
ESG	−0.222 ***	−0.142 **	−1.319 ***	−1.034 ***	−0.969 ***	−0.624 *
	(−3.333)	(−2.014)	(−4.069)	(−2.996)	(−2.990)	(−1.805)
Digital		20.776 ***		4.732 ***		5.454 ***
		(3.636)		(2.908)		(3.344)
ESG × Digital		−0.281 ***		−1.072 ***		−1.238 ***
		(−3.528)		(−2.639)		(−3.037)
Controls	yes	yes	yes	yes	yes	yes
Constant	15.809 **	10.959 *	1.884	1.812	3.783	3.590
	(2.582)	(1.752)	(0.423)	(0.409)	(0.857)	(0.822)
Ind/Year	yes	yes	yes	yes	yes	yes
Observations	516	516	516	516	516	516
Adj.R2	0.111	0.145	0.086	0.105	0.106	0.131

Notes: ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

presents the results of the above regression. The coefficient of ESG is still significantly negative, indicating a robust conclusion.

4.3.2. Endogeneity Tests

The impacts of ESG practices on the valuation of related party M&A assets may include endogeneity issues. First, overvalued M&A assets may increase the possibility of performance changes. Companies tend to invest more resources in M&A integration activities, which reduces their ability to fulfill social responsibilities. Asset valuation can also have an impact on ESG practices. Therefore, we adopt the two-stage least squares method (2SLS) to solve the reverse causality problem. ESG funds have a positive impact on ESG practices through the adoption of strategies such as “voting with feet” or engaging with executives through private channels [61,62], meeting the principle of relevance. At the same time, the shareholding of ESG funds depends on the investment philosophy of the fund company and does not directly affect the valuation of M&A assets, meeting the principle of exogeneity. Therefore, we selected the market value of ESG fund holdings in enterprises (FV) as the instrumental variable. Column (1) of

Table 6. Endogeneity tests—2SLS regression and PSM regression.

	2SLS		PSM
	(1)	(2)	(3)
	ESG	Abrev	Abrev
ESG		−2.377 **	−1.696 ***
		(−2.384)	(−3.961)
FV	0.466 ***
	(2.783)
Controls	yes	yes	yes
Constant	0.624	11.510 *	0.160
	(0.611)	(1.891)	(0.034)
Ind/Year	yes	yes	yes
Observations	516	516	285
Adj.R2	0.067	0.097	0.211

Notes: ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

presents the first stage regression results of the instrumental variables. The coefficient of FV is 0.466, which is still significantly positive at the 1% level. Column (2) of Table 6 presents the results of the second stage regression. The coefficient of ESG is −2.377, which is still significantly negative at the 5% level. This indicates that after excluding the reverse causal relationship between ESG practices and M&A asset valuation, the original results still hold, and the conclusion is robust.

Second, whether a firm will overestimate related party M&A assets is not exogenously determined; rather, this hinges on a strategic choice made by controlling shareholders and managers based on the actual situation of the company. At the same time, some firms may choose to conceal ESG-related information because of market competition, resulting in errors in their ESG rating information [63]. Therefore, there may be sample selection bias. Following the literature [18,52], the 30% quantile of ESG practices is selected as the breakpoint. Firms with ESG practices above 30% are the treatment group, while the rest are the control group. The propensity scores are calculated using Logit model, and 1:1 nearest neighbor matching is adopted to obtain the final control group sample. Column (3) of Table 6 reports the results of the propensity score matching (PSM) model. The coefficient of ESG is −1.696, which is still significantly negative at the 1% level. This indicates that the mitigating effect of ESG practices on the overvaluation of related party M&A assets is not affected by sample selection bias.

5. Mechanism Tests

5.1. Channel Tests

When analyzing the impact of ESG practices on the valuation of related party M&A assets, we propose four pathways: performance commitment, intermediary reputation, information dissemination, and agency cost. Below, we conduct detailed empirical tests.

5.1.1. Performance Commitment

We examined the mediating path of performance commitment, considering the performance commitment growth rate (G_PCC) and stock compensation (P_PCC). G_PCC is the average annual growth rate of performance commitments. The value of P_PCC is 1 when stock compensation is included, otherwise it is 0 [43,44]. Columns (1) and (2) of

Table 7. Channel test—Performance commitment.

	(1)	(2)	(3)	(4)
	P_PCC	G_PCC	Abrev	Abrev
ESG	0.056 ***	−0.216 ***	−1.201 ***	−0.796 ***
	(3.326)	(−3.009)	(−3.678)	(−2.694)
P_PCC			−2.288 **
			(−2.141)
G_PCC				3.193 ***
				(13.038)
Controls	yes	yes	yes	yes
Constant	0.244	0.567	5.407	4.612
	(1.056)	(0.551)	(1.216)	(1.107)
Ind/Year	yes	yes	yes	yes
Observations	516	516	516	516
Adj.R2	0.049	0.061	0.134	0.452

Notes: *** and ** denote significance at the 1% and 5% levels, respectively.

report the impact of ESG practices on performance commitment growth rate and stock compensation, respectively. The results indicate that firms with good ESG practices tend to adopt stock compensation and can reduce the growth rate of performance commitment. In columns (3) and (4) of Table 7, the coefficients of ESG are significantly negative at the 1% level, the coefficient of P_PCC is significantly negative at the 5% level, and the coefficient of G_PCC is significantly positive at the 1% level. These results support H1a, indicating that the inhibitory effect of ESG practices on asset overvaluation remained unchanged, after controlling for the performance commitment mechanism, which mediated the negative relationship between ESG practices and asset valuation.

5.1.2. Intermediary Reputation

We examined the mediating path of intermediary reputation, considering the asset appraisal institution reputation (VA) and financial advisor reputation (FA). According to the ranking of asset appraisal institutions published by the China Asset Appraisal Society, when an asset appraisal institution ranks in the top 10, the VA value is 1, otherwise it is 0. We measured the reputation of financial advisers according to the market share ranking of securities companies in the year before M&A. The FA value is 1 when the financial adviser is ranked in the top 10, otherwise it is 0 [64,65]. Columns (1) and (2) of

Table 8. Channel test—Intermediary reputation.

	(1)	(2)	(3)	(4)
	VA	FA	Abrev	Abrev
ESG	0.075 ***	0.071 **	−1.250 ***	−1.243 ***
	(2.908)	(2.501)	(−3.870)	(−3.575)
VA			−1.389 **
			(−2.030)
FA				−1.395 **
				(−2.065)
Controls	yes	yes	yes	yes
Constant	−0.463	−0.152	4.177	4.818
	(−1.307)	(−0.405)	(0.952)	(1.066)
Ind/Year	yes	yes	yes	yes
Observations	516	516	516	516
Adj.R2	0.049	0.038	0.137	0.130

Notes: *** and ** denote significance at the 1% and 5% levels, respectively.

report the impact of ESG practices on the reputation of asset appraisal institution and financial advisor, respectively. The results indicate that firms with good ESG practices tend to choose high reputation asset appraisal institutions and financial advisors. In columns (3) and (4) of Table 8, the coefficients of ESG are significantly negative at the 1% level, while the coefficients of VA and FA are significantly negative at the 5% level. These results support H1b, indicating that the inhibitory effect of ESG practices on asset overvaluation remains unchanged, after controlling for the reputation mechanism which mediates the negative relationship between ESG practices and asset valuation.

5.1.3. Information Dissemination

We examined the mediating path of information dissemination, considering the analyst following (Analyst) and social media discussion (Post). Analyst refers to the number of analysts who released profit forecast reports for enterprises. Post denotes the natural logarithm of the number of posts received by the company on the East Money stock forum [51,66]. Columns (1) and (2) of

Table 9. Channel test—Information dissemination.

	(1)	(2)	(3)	(4)
	Analyst	Post	Abrev	Abrev
ESG	0.041 ***	0.165 ***	−1.248 ***	−1.163 ***
	(4.150)	(3.857)	(−3.827)	(−3.607)
Analyst			−3.437 *
			(−1.957)
Post				−0.982 **
				(−2.422)
Controls	yes	yes	yes	yes
Constant	−0.248 *	6.824 ***	3.608	11.550 **
	(−1.814)	(11.604)	(0.825)	(2.247)
Ind/Year	yes	yes	yes	yes
Observations	516	516	516	516
Adj.R2	0.251	0.103	0.138	0.140

Notes: ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

report the impact of ESG practices on analyst following and social media discussions, respectively. The results indicate that companies with good ESG practices have increased analyst following and social media discussions. In columns (3) and (4) of Table 9, the coefficients of ESG in columns (3) and (4) of Table 9 are significantly negative at the 1% level, the coefficient of Analyst is significantly negative at the 10% level, and the coefficient of Post is significantly negative at the 5% level. These results support H1c, indicating that the inhibitory effect of ESG practices on asset overvaluation remains unchanged, after controlling for the information dissemination mechanism which mediates the negative relationship between ESG practices and asset valuation.

5.1.4. Agency Cost

We examined the mediating path of agency cost, considering the managerial agency cost (AC1) and controlling shareholder agency cost (AC2). AC1 is the operating expense ratio expressed as (management expenses + sales expenses)/ operating income. AC2 is the ratio of other receivables to total assets [67]. Columns (1) and (2) of

Table 10. Channel test—Agency cost.

	(1)	(2)	(3)	(4)
	AC1	AC2	Abrev	Abrev
ESG	−0.039 ***	−0.006 ***	−1.180 ***	−1.222 ***
	(−3.747)	(−3.388)	(−3.660)	(−3.794)
AC1			3.698 **
			(2.221)
AC2				16.163 *
				(1.736)
Controls	yes	yes	yes	yes
Constant	0.530 ***	−0.013	2.886	5.053
	(3.697)	(−0.495)	(0.652)	(1.161)
Ind/Year	yes	yes	yes	yes
Observations	516	516	516	516
Adj.R2	0.148	0.059	0.138	0.133

Notes: ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

, respectively, report the impact of ESG practices on agency costs for managers and controlling shareholders. The results indicate that ESG practices reduce agency costs for managers and controlling shareholders. In columns (3) and (4) of Table 10, the coefficients of ESG are significantly negative at the 1% level, the coefficient of AC1 is significantly negative at the 5% level, and the coefficient of AC2 is significantly negative at the 10% level. These results support H1d, indicating that the inhibitory effect of ESG practices on asset overvaluation remains unchanged, after controlling for the agency cost mechanism which mediates the negative relationship between ESG practices and asset valuation.

5.2. Heterogeneity Tests

We divided the sample into horizontal M&A (Horizontal) and non-horizontal M&A (Non-Horizontal). Columns (1) and (2) of

Table 11. Cross-sectional heterogeneity tests.

	M&A Type		Ownership Type
	(1)	(2)	(3)	(4)
	Horizontal	Non-Horizontal	SOE	Non-SOE
ESG	−0.619 **	−3.683 ***	−0.149	−2.480 ***
	(−2.324)	(−3.621)	(−0.668)	(−3.717)
p-value	0.064 *		0.071 *
Controls	yes	yes	yes	yes
Constant	2.734	14.352	5.641	3.715
	(0.783)	(0.974)	(1.877)	(0.392)
Ind/Year	yes	yes	yes	yes
Observations	405	111	287	229
Adj.R2	0.137	0.204	0.108	0.100

Notes: ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.

show that in the sample of non-horizontal M&A (Non-Horizontal), the coefficient of ESG is greater than that in the sample of horizontal M&A (Horizontal) and passes the inter group coefficient difference test. These results support H3, indicating that ESG practices have a more significant effect on reducing the overvaluation of related party M&A assets in non-horizontal M&A.

We divided the sample into state-owned enterprises (SOE) and non-state-owned enterprises (Non-SOE). Columns (3) and (4) of Table 11 show that in the sample of state-owned enterprises (SOE), the coefficient of ESG is negative but not significant. In the sample of non-state-owned enterprises (Non-SOE), the coefficient of ESG is significantly negative at the 1% level and has passed the inter group coefficient difference test. These results support H4, indicating that ESG practices have a more significant effect on reducing the overvaluation of related party M&A assets in non-state-owned enterprises.

6. Further Analysis

The high premium of related party M&A is an important feature of the Chinese M&A market [4]. Excessive premiums increase the cost of M&A, affecting subsequent integration and value creation of firms [68], thereby exacerbating the risk of stock price crashes and undermining the sustainable development of the capital market. The high valuation of assets is the main reason behind the high premiums in M&A. ESG contributes to the achievement of good market performance. Therefore, we conduct further tests to determine whether ESG practices could reduce the risk of stock price crash by mitigating the overvaluation of related party M&A assets. We used the negative coefficient of skewness (NCSKEW) and the down-to-up volatility (DUVOL) of stock returns to measure the stock price crash risk (Crash).

Columns (1) and (2) of

Table 12. Economic consequence.

	(1)	(2)	(3)	(4)	(5)
	NCSKEW	DUVOL	Abrev	NCSKEW	DUVOL
ESG	−0.147 ***	−0.178 ***	−1.366 ***	−0.133 ***	−0.152 ***
	(−4.954)	(−3.878)	(−4.189)	(−4.377)	(−3.243)
Abrev				0.010 **	0.019 **
				(2.077)	(2.475)
Controls	yes	yes	yes	yes	yes
Constant	−0.136	−0.633	4.983	−0.188	−0.729
	(−0.333)	(−1.004)	(1.112)	(−0.463)	(−1.163)
Ind/Year	yes	yes	yes	yes	yes
Observations	489	489	489	489	489
Adj.R2	0.057	0.043	0.132	0.066	0.058

Notes: *** and ** denote significance at the 1% and 5% levels, respectively.

report that the coefficients of ESG are significantly negative at the 1% level, indicating that companies with good ESG practices can significantly reduce the stock price crash risk. The results in column (3) of Table 12 are consistent with the baseline regression results mentioned earlier. Columns (4) and (5) of Table 12 report that the coefficients of ESG are still significantly negative at the 1% level, while the coefficients of Abrev are significantly positive at the 5% level. This indicates that the ESG practices have resulted in economic consequences by reducing the valuation of related party M&A assets, thereby reducing the stock price crash risk.

7. Discussion

Based on stakeholder theory, this article clarified the impact of ESG practices on the valuation of related party M&A assets and the underlying mechanisms. First, the negative relationship between ESG practices and the overvaluation of related party M&A assets suggests that ESG practices can alleviate the dilution of minority shareholders’ interests caused by asset overvaluation in M&A, thereby maintaining market fairness. The digital economy strengthens this negative correlation, indicating that digital technologies such as big data, artificial intelligence, and blockchain are driving companies to actively engage in ESG practices, providing new digital solutions to address issues such as major shareholder manipulation of asset valuation and insufficient protection of minority shareholders. Meanwhile, the four identified mediating mechanisms collectively explain the negative relationship between ESG practices and asset overvaluation. On the one hand, this affirms the information dissemination mechanism and agency cost mechanism already identified in most literature [22,24]. On the other hand, it extends the reputation mechanism of financial institutions specific to M&A (asset appraisal institutions and financial advisers) and performance commitment mechanisms, effectively revealing the significant impact of internal and external governance factors on asset evaluation. Second, the issue of asset overvaluation is more severe in the samples of non-state-owned firms and non-horizontal M&A, which is consistent with existing research [23] and provides guidance for regulators and minority investors on the key directions of future governance participation. Third, ESG practices mitigate the risk of stock price crash by reducing the overvaluation of related party M&A assets. This indicates that by emphasizing ESG practices, firms can not only ensure fair asset valuation in M&A but also enhance overall stability and resilience, reducing wealth loss for shareholders.

7.1. Policy Implications

For financial markets, understanding and focusing on the mitigating role of ESG practices in asset overvaluation can help prevent corporate stock price crashes and the systemic financial risks caused by individual stock risk contagion. This is beneficial for long-term shareholder wealth maximization. Overpaying for target assets is a major cause of post-merger goodwill impairment and stock price volatility, which adversely affects the reputation of listed firms, their refinancing activities, and the development of the financial market. ESG practices can promptly communicate asset valuation information to the market, which is of great significance for enhancing investor protection, improving stock liquidity, and reducing macro systemic financial risks.

For listed firms, the development of the ESG information environment and digital economy plays a positive role in promoting corporate transformation and upgrading through M&A. This suggests that listed firms should actively fulfill ESG disclosure obligations and improve the level of M&A asset information disclosure, reducing opportunistic behavior by controlling shareholders and managers. Firms should also actively enhance corporate value through related party M&A. Furthermore, companies should adhere to the sustainable development concept in ESG practices, prioritize choosing high-reputation financial intermediaries, and set reasonable performance commitment clauses to reduce M&A risks, improving corporate transformation and upgrading capabilities and sustainable development levels.

For regulatory authorities, on one hand, governments and regulators should establish and improve ESG-related policies and systems, promote the standardization of ESG information disclosures, and increase penalties for false ESG disclosures. This will help supervise corporate ESG practices and strengthen the governance effect of ESG. At the same time, they should strengthen normative management of analysts and social media, fully leveraging the external governance role of analysts and social media. On the other hand, governments should strengthen digital economy infrastructure, fully utilize the positive effects of the digital economy on environmental practices, social sustainability, and governance structures, and promote the integrated development of the digital economy and firms, providing more technical support and returns for stakeholders in M&A.

7.2. Research Limitations and Perspectives

First, this study used the Hua Zheng ESG rating without segmenting industries. Future research can develop more precise and industry-specific ESG evaluation indicators to support effective asset value assessment for firms in various industries. Second, although this study has shown that ESG practices can protect minority shareholders’ interests by reducing the asset overvaluation, it lacks exploration of the long-term protection of minority shareholders’ rights after the completion of M&A. Future research can construct a long-term tracking model to analyze how ESG factors in various dimensions influence corporate strategic decisions, resource allocation, and other aspects during the M&A integration process, providing feasible suggestions for the sustainable development of M&A firms and the long-term protection of minority shareholders’ interests. Third, this study used the sample of Chinese listed firms. Future research can expand the sample to include firms from different countries and regions worldwide, extend the time span, and incorporate data from more economic cycles.

8. Conclusions

We empirically examined the relationship between ESG practices and the valuation of related party M&A assets and its mechanism using data compiled on A-share listed firms in the Shanghai and Shenzhen stock markets between 2010 and 2023. Our key findings are as follows. First, ESG practices can significantly reduce the valuation of related party M&A assets, and the relationship between them is positively moderated by an advancing digital economy. Following a series of endogeneity and robustness tests, this conclusion remains valid. Second, the results of mediation analysis suggest that ESG practices are mainly alleviated by setting up equity performance compensation, reducing the growth rate of performance commitment, selecting reputable asset appraisal institutions and financial advisors, performing comprehensive analyst following and social media discussions, and reducing agency costs to alleviate the problem of overvalued assets. Third, the results of our heterogeneity analysis suggest that the problem of overvalued assets is more severe in non-state-owned firms and non-horizontal M&A samples, and the governance role of ESG practices is also stronger. Fourth, further analysis revealed that ESG practices can alleviate the risk of stock price crash and promote capital market stability by reducing the overvaluation of related party M&A assets.