Environmental factors, social responsibility and corporate governance and financial performance of the company
This research analyzes the relationship between environmental, social and governance (ESG) factors and firm value. ESG strengths positively impact valuation, while ESG concerns impair the overall market value. ESG and value of the company: arguments.
| Рубрика | Менеджмент и трудовые отношения |
| Вид | дипломная работа |
| Язык | английский |
| Дата добавления | 10.12.2019 |
| Размер файла | 1,8 M |
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As for second-stage 2SLS regression, the model is also significant (p-value = 0.0000) and we see that significant part of Tobin's Q variance is explained by the variance of independent variables (R-squared = 0.54). The instrumented variables are disclosure and cross-variables of ESG strengths/concerns and disclosure. The main interest lies in beta-coefficients of ESG disclosure, ESG strengths and ESG concerns, as well as cross-variables of ESG performance and ESG disclosure. All the variables concerning ESG disclosure and ESG performance are significant at 95% or 90% confidence level, so it is possible to interpret partial effects of these variables.
Among the control variables, Tobin's Q is increased by ROA, advertising and R&D intensity, net to gross PPE (advertising intensity is significant at 90%). Tobin's Q is decreased by firm size, asset intensity, and 1 of the year-effects dummies (however, only at 90% confidence level). Some of the control variables are insignificant (growth of ROA, leverage, industry dummies).
To proceed with partial effects, explanation of Tobin's Q is needed. It can be interpreted in absolute values or percentage as it means ratio of adjusted market value to book value (e.g., average Tobin's Q in the sample = 2.29 or 229%); in this study percentage values are used. As for ESG disclosure impact, for an average firm in the sample the effect of incremental point to ESG disclosure is -4.6% (-0.0115-0.001*57.81+0.001*23.84= -0.046 or -4.6%). However, if a firm has less ESG strengths than ESG concerns, the effect of intensifying disclosure can be beneficial for a firm. The possible explanation is that investors might One possible explanation is that, if the firm has many ESG strengths, high level of ESG disclosure may signal overinvesting in ESG for investors. Another possible explanation is that investors may perceive too detailed ESG disclosure as an attempt to seem socially responsible and cover up its cons - or go with "greenwashing". Keeping these results in mind, it is possible that rather low ESG disclosure score (average value is 34 out of 100) might be a reasonable strategy for many companies in the sample.
As for ESG strengths and concerns, the mediating effect of ESG disclosure in relationship with Tobin's Q is observed. Thus, on average adding to ESG strengths' score by 1 (it means +10 points in total for 11 categories compiling ESG strengths) for a firm with an average ESG disclosure results in increase in Tobin's Q by 2% (0.550-0.001*34.04=0.020 or 2.0%). We see that ESG disclosure has a mediating effect, and the more ESG disclosure score is, the less a positive effect of ESG strengths on Tobin's Q is. This means that firms with lower ESG disclosure have more benefits from improving ESG advantages. ESG concerns' conditional effect on Tobin's Q is -5.4% (-0.090+0.001*34.04= -0.054 or -5.4%). There is a mitigating effect of ESG disclosure which weakens negative influence of ESG concerns. It may be explained either by the justification of company's actions while being more ESG-transparent or by the overviewing the reasons and action plans to tackle ESG concerns. Also, wider ESG disclosure allows to weaken stakeholders' information asymmetry, making them more aware about ESG risks.
All in all, ESG disclosure performs as a mediator in a relationship between ESG performance and firm value, and the higher ESG disclosure is, the lower effect of ESG performance on firm value is observed. However, intensifying ESG disclosure itself is often not beneficial to firm value if a company has good ESG performance with ESG pros significantly outweighing ESG cons.
Display 6 Second-stage regression results
According to the research findings, 2 hypotheses (H1-H2) are confirmed: ESG concerns negatively impact firm value and ESG strengths positively influence firm value. However, if a firm has high level of ESG disclosure (more than 53, it is equal to 90% percentile), the positive effect is about to disappear. As for the last hypothesis H3 stating there is no relationship between ESG disclosure and firm value, it is rejected as there is a negative effect of stand-alone ESG disclosure and a mitigating effect of ESG disclosure regarding ESG strengths' or ESG concerns' impact on firm value.
Conclusion
The relationship between ESG performance, ESG disclosure and firm value is ambiguous both from theoretical point and extant research results. There are 2 opinions regarding ESG performance and firm value relationship. First position states that any ESG activities imply additional costs, and because the costs of a firm increase, it should result in decreased profitability. Nevertheless, the strategies of many companies demonstrate that significance of ESG activities increases. This implies that these policies should be beneficial to enterprises, for instance, they may be valued higher for reduced risks in the long term and thus increase firm value. The similar ambiguity is true for ESG disclosure: first, the decrease in information asymmetry due to better ESG disclosure improves stakeholders' understanding of ESG strengths and weaknesses; second, too much disclosure can be interpreted as a "greenwashing". On the one hand, weaker asymmetry should positively influence firm value, and on the other hand, if investors perceive ESG disclosure as "greenwashing", it might impair company value.
In this study the relationship of abovementioned factors is observed with 2SLS regression method and on an advanced ESG data provided by Bloomberg and Thomson Reuters. The results of the study indicate that ESG strengths increase firm value and that ESG concerns reduce it. As for ESG disclosure, if taken without ESG performance, it is found to decrease firm value as well. The possible explanation is that investors and other stakeholders can perceive company's focus on ESG disclosure as an attempt to appear more sustainable than it is ("greenwashing") or that a company tends to overinvest in ESG.
However, a more interesting relationship is observed when ESG disclosure is taken together with ESG strengths and ESG concerns. Together with ESG strengths, higher ESG reporting weakens the beneficial effect of firm's strengths on firm valuation. A possible ground for this observed relationship is that stakeholders may perceive high level of voluntary disclosure as a company's wish to rationalize an overinvestment in ESG activities. Another plausible reason is that investors can interpret increase in ESG disclosure as "cheap talk" - the situation when a company attempts to seem more socially responsible than it truly is. ESG disclosure also mitigates the negative effects of ESG concerns on firm value, probably either since transparency can help firms to legitimate their activities by explaining to the market the rationale of their business operations and ESG policies; or since companies can explain to investors via ESG reporting that they have taken actions to change business processes and get control of ESG weaknesses. Finally, the mitigating effect can be connected to weaker information asymmetry allowing stakeholders to keep track of ESG risks.
The findings of the study allow to make one more assumption about ESG disclosure and ESG performance simultaneous influence on firm financial performance. The mitigating effect of ESG disclosure may signal that investors evaluate ESG efforts higher when a company struggles with environmental, social or governance challenges; and vice versa, when a company is doing great in terms of ESG, too much concentration on ESG issues (and high level of ESG reporting) might negatively impact firm value, as investors may consider wide ESG agenda to be a sign of inefficient spending. Thus, the right strategy for a company is to keep balancing between too much ESG risk exposure on one side, and too much focusing on ESG activities and ESG transparency on the other side.
To conclude, all the tasks of the study are completed, as well as the goal: the relationship between ESG performance, ESG disclosure and value of a company was determined. The further study can address the issue of exploring the effects of ESG performance and disclosure in different markets, as well as breaking it down into 3 pillars of ESG.
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Appendix
Attachment 1 First-regression (dependent variable ESG disclosure)
Attachment 2 First-regression (dependent variable ESG disclosure*ESG concerns)
Attachment 3 First-regression (dependent variable ESG disclosure*ESG strengths)
Attachment 4 Results of test for weak instruments
Attachment 5 Results of test for overidentification
Attachment 6 Results of test for endogeneity
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