How Private Enterprises Improve Their ESG Performance: An Examination Based on the Reverse Mixed‐Ownership Reform

Research Question/Issue This paper exploits the introduction of minority state ownership into private firms (i.e., reverse mixed‐ownership reform) as a quasinatural experiment and employs a staggered difference‐in‐differences model to identify the causal effect on the ESG performance of private firms. Research Findings/Insights Using a sample of private firms listed on China's A‐share market over the period 2009–2021, this study finds that reverse mixed‐ownership reform significantly improves the ESG performance of private firms. Minority state ownership serves as a means of filling institutional voids, with its core mechanism operating through the alleviation of financing constraints and the acquisition of government subsidies and tax incentives. This effect is more pronounced among firms that simultaneously face high financing constraints and high ESG investment opportunities, and it weakens as the regional financial institutional environment improves. Further analysis shows that the promotional effect of minority state ownership exhibits an optimal ownership range and is driven primarily by the initial introduction of state capital. Tests of economic consequences indicate that the resulting improvement in ESG performance significantly enhances the long‐term value of firms with both high financing constraints and high ESG investment opportunities, while reducing their cost of debt capital. Theoretical/Academic Implications Drawing on institutional theory, this study proposes that minority state ownership performs a governance function of filling institutional voids in transition economies, offering a new theoretical explanation for the ESG effects of reverse mixed‐ownership reform and deepening the understanding of the mechanisms through which state ownership operates within the mixed‐ownership reform literature. In addition, by identifying boundary conditions at both the micro and macro levels, this study reveals the context‐dependent nature of the ESG effect of minority state ownership, providing empirical evidence on how the institutional environment shapes the effectiveness of governance mechanisms. Practitioner/Policy Implications This study reveals the optimal ownership range within which minority state ownership influences the ESG performance of private firms, providing a basis for the government to strategically advance reverse mixed‐ownership reform and ESG policies, as well as practical guidance for private firms to optimize their corporate governance structures and equity arrangements.