Government Auditing and Corporate Sustainability: Evidence from a Quasi-Natural Experiment in China

National governments increasingly promote corporate sustainability through approaches ranging from rigid mandates to voluntary market-based compliance. State auditing may offer a middle-ground governance mechanism, but its role in improving Corporate Sustainability Performance (CSP) remains underexplored. China provides a distinctive setting: the China National Audit Office (CNAO), the country’s supreme audit institution under the State Council, audits state-owned enterprises (SOEs). Exploiting staggered CNAO interventions, we apply a staggered difference-in-differences design to 7883 firm-year observations of Chinese A-share-listed SOEs from 2009 to 2022. Government audit exposure is associated with a statistically significant but modest 0.118-point increase in CSP, measured using Huazheng (Sino-Securities) ESG ratings, equivalent to about 0.12 standard deviations. The result is robust to propensity score matching, parallel-trend and placebo tests, ESG-pillar decomposition, and external validation using green patent filings. Information disclosure quality and media attention strengthen the effects, indicating that transparency and public scrutiny amplify government oversight. Effects are more pronounced among non-heavily polluting industries, larger firms, firms with fewer financing constraints, and enterprises located in eastern China. These patterns suggest that audited SOEs respond as cost-benefit-sensitive market participants rather than passive state agents. These findings imply that structured governmental oversight can promote sustainability when complemented by transparency mechanisms and adequate firm-level capacity.