Effect of ESG Activities and Firm’s Financial Characteristics

Abstract

In this study, we examine how environmental, social, and corporate governance (ESG) activities differently affect firm value depending on a firm’s financial characteristics. The qualitative aspect of ESG activities, which is not reflected in ESG scores, is valued in the market based on a firm’s financial characteristics and is the motivation for the present study. We conducted empirical analyses employing multiple ESG score sets obtained from two different ESG evaluation institutions for the recent four-year period. We found that ESG performance has a positive effect on firm value, though some variations occur across the ESG element types, which is consistent with previous results. The positive effect is more pronounced in firms with higher profitability or foreign ownership, which implies that ESG activities can have a greater impact on firms with a strong financial ability to sustain these activities or those with disciplined foreign investors to monitor transparency. These results are robust to the two-stage least squares analysis to capture the reverse causality between ESG performance and financial variables. Our findings suggest that to maximize the effect of ESG activities, firms need to build market confidence through financial efforts, such as enhancing profitability and attracting foreign investments.