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ABSTRACT This study explores whether institutional investors' ESG preferences affect firms' real investment decisions in China. Using quarterly panel data from Q1 2009 to Q4 2023, we construct a measure of ESG‐oriented institutional ownership ( ESGIO ) and find that firms with higher ESGIO exhibit significantly greater capital expenditures, and this remains robust after distinguishing from the effect of general institutional ownership. This relation is also robust to various specifications and endogeneity concerns. Mechanism tests show that the relation between ESGIO and investment is stronger when stock prices are more informative and trading liquidity is higher. The effect is stronger among non‐state‐owned enterprises, highly leveraged firms, firms with lower internal cash flow, lower ESG rating divergence, externally assured ESG disclosures and during periods of elevated investor sentiment. This paper highlights the role of capital markets in promoting sustainable corporate investment and offers policy insights, suggesting that an enhanced ESG disclosure framework can facilitate the allocation of ESG‐aligned patient capital.
Tang et al. (Fri,) studied this question.