The impact of investments in corporate social performance measured by the value of cash holdings

Abstract

Corporate investment in environmental and social initiatives has increased significantly in recent years as a response to increasingly complex and demanding socio-economic environments. Nonetheless, a question that remains unanswered is whether investments in social and environmental initiatives create firm value and, if yes, in which way value is created. The objective of this study is to fill this gap by investigating the relationship between investments in Environmental, Social and Governance (ESG) practices and firm value by comparing the market value of an extra dollar of cash for firms with high and low ESG ratings. Our results show that an extra dollar of cash is valued at a premium of $0.13 (or 13%) in high ESG firms as compared to low ESG firms. We find evidence to support the stakeholders theory and the resource based view by showing that managers who invest in ESG practices that have received the support of key stakeholders are acquiring resources that are unique and inimitable. Therefore, they create a sustainable competitive advantage for their companies, which positively affects value and reduces agency costs. We also show evidence that financial slack has value in the presence of future investment opportunities and when the cost and availability of capital is uncertain.