Hometown Folks in the Right Places: Political Connections and Corporate ESG

ABSTRACT

This paper examines whether, how, and under what conditions political connections shape firms' environmental, social, and governance (ESG) performance in China. Exploiting the “locality avoidance” rule, we construct hometown‐based ties between municipal leaders and listed‐firm executives that generate plausibly exogenous variation in political connections, and combine this with an instrumental‐variable strategy based on pre‐appointment executive composition and tenure‐based dynamics tests. We find that hometown ties significantly raise ESG performance, with the largest gains in corporate governance, and do not increase greenwashing. Moreover, firm‐level evidence—higher environmental investment, lower carbon intensity, greater charitable donations, and higher green total factor productivity—indicates substantive rather than cosmetic ESG improvements. Bureaucratic promotion pressure and clan‐based regional culture amplify the effectiveness of hometown connections by strengthening officials' incentives and informal leverage over same‐origin executives. Further analyses show that connected firms receive fewer environmental penalties and, among high‐ESG firms, enjoy lower taxes and better access to short‐term bank loans, while city‐level ESG is associated with higher environmental and infrastructure spending and lower unemployment, aligning with cadre promotion criteria. Finally, the ESG gains from political connections are more pronounced in markets with stronger competition and among smaller, non‐SOEs firms. Our results imply that political connections can transmit sustainability policies rather than solely facilitate rent extraction in specific institutional and competitive environments.