Relationship of ESG scores on firm performance: Moderating roles of board size and CEO duality

Sansanee Meeprom, Wachira Boonyanet, Supa Tongkong

Article ID: 4403
Vol 8, Issue 7, 2024

VIEWS - 2617 (Abstract)

Abstract


The aim of this study is to examine the relationship between Environmental, Social and Governance (ESG) activities and the performance of Thai listed firms. The moderating roles of board size and CEO duality on this relationship are also assessed. The ESG score provided by LSEG (formerly Refinitiv) is chosen to measure ESG activities, both as an overall ESG combined scores and as Environment, Social, and Governance pillar scores. Multiple regression analysis is used to test the impact of ESG on firm performance while the PROCESS macro is used to test the moderating effects. Results reveal that the overall ESG combined score demonstrates no statistically significant effect on firm market-based performance. However, it shows the significant effects on firm performance for both the ESG combined score and the Environmental and Social pillar scores when moderated by board size and CEO duality; Governance pillar score exhibits no significant effect. Additionally, it is found that when the CEO operates only as the managing director and small board size and average board size are evident, higher ESG disclosure scores enhance firm performance. However, when the CEO serves as both managing director and chairman of the board of directors, and where there is a large board size, higher ESG disclosure scores diminish firm performance. This study contributes to the ESG literature and encourages companies to enhance their performance by implementing ESG combined activities with good governance policies.


Keywords


environment; social, governance; Tobin’s Q; sustainability; corporate governance

Full Text:

PDF


References

  1. Abidin, Z. Z., Kamal, N. M., & Jusoff, K. (2009). Board Structure and Corporate Performance in Malaysia. International Journal of Economics and Finance, 1(1). https://doi.org/10.5539/ijef.v1n1p150
  2. Aiken, L. (1991). Multiple regression: Testing and interpreting interactions. Sage Google Scholar, 2, 103–135.
  3. Alhossini, M. A., Ntim, C. G., & Zalata, A. M. (2021). Corporate Board Committees and Corporate Outcomes: An International Systematic Literature Review and Agenda for Future Research. The International Journal of Accounting, 56(01), 2150001. https://doi.org/10.1142/s1094406021500013
  4. Aras, G., & Hacioglu Kazak, E. (2022). Enhancing Firm Value through the Lens of ESG Materiality: Evidence from the Banking Sector in OECD Countries. Sustainability, 14(22), 15302. https://doi.org/10.3390/su142215302
  5. Aydoğmuş, M., Gülay, G., & Ergun, K. (2022). Impact of ESG performance on firm value and profitability. Borsa Istanbul Review, 22, S119–S127. https://doi.org/10.1016/j.bir.2022.11.006
  6. Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182. https://doi.org/10.1037/0022-3514.51.6.1173
  7. Behl, A., Kumari, P. S. R., Makhija, H., et al. (2022). Exploring the relationship of ESG score and firm value using cross-lagged panel analyses: case of the Indian energy sector. Annals of Operations Research, 313(1), 231–256. https://doi.org/10.1007/s10479-021-04189-8
  8. Black, R., Sullivan, R., Harvey, E., & Priovashini, C. (2022). ESG Disclosure assessment of Thailand’s listed companies and recommendations for policy development. Prepared by Chronos Intelligent Sustainability to the Stock Exchange of Thailand. Chronos Intelligent Sustainability. https://www.sec.or.th/TH/Documents/OneReport/OneReport-ESG.pdf
  9. Cao, S., Yao, H., & Zhang, M. (2023). CSR gap and firm performance: An organizational justice perspective. Journal of Business Research, 158, 113692. https://doi.org/10.1016/j.jbusres.2023.11369 https://doi.org/10.1016/j.jbusres.2023.113692
  10. Carter, D. A., D’Souza, F., Simkins, B. J., et al. (2010). The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance. Corporate Governance: An International Review, 18(5), 396–414. Portico. https://doi.org/10.1111/j.1467-8683.2010.00809.x
  11. Chang, Y.-J., & Lee, B.-H. (2022). The Impact of ESG Activities on Firm Value: Multi-Level Analysis of Industrial Characteristics. Sustainability, 14(21), 14444. https://doi.org/10.3390/su142114444
  12. Chen, Z., & Xie, G. (2022). ESG disclosure and financial performance: Moderating role of ESG investors. International Review of Financial Analysis, 83, 102291. https://doi.org/10.1016/j.irfa.2022.102291
  13. Chen, S., Song, Y., & Gao, P. (2023). Environmental, social, and governance (ESG) performance and financial outcomes: Analyzing the impact of ESG on financial performance. Journal of Environmental Management, 345, 118829. https://doi.org/10.1016/j.jenvman.2023.118829
  14. Dincă, M., Vezeteu, C., & Dincă, D. (2022). The relationship between ESG and firm value. Case study of the automotive industry. Frontiers in Environmental Science, 10, 2655. https://doi.org/10.3389/fenvs.2022.1059906
  15. Duru, A., Iyengar, R. & Zampelli, E. (2016). The dynamic relationship between CEO duality and firm performance: the moderating role of board independence. Journal of Business Research, 69(10), 4269-4277. https://doi.org/10.1016/j.jbusres. 2016.04.001. https://doi.org/10.1016/j.jbusres.2016.04.001
  16. Fan, Y., Boateng, A., King, T., et al. (2019). Board-CEO friendship ties and firm value: Evidence from US firms. International Review of Financial Analysis, 65, 101373. https://doi.org/10.1016/j.irfa.2019.101373
  17. Freeman, R. (1984). Stakeholder management: framework and philosophy. Pitman.
  18. Fuadah, L. L., Mukhtaruddin, M., Andriana, I., et al. (2022). The Ownership Structure, and the Environmental, Social, and Governance (ESG) Disclosure, Firm Value and Firm Performance: The Audit Committee as Moderating Variable. Economies, 10(12), 314. https://doi.org/10.3390/economies10120314
  19. Garcia, A. S., Mendes-Da-Silva, W., & Orsato, R. J. (2017). Sensitive industries produce better ESG performance: Evidence from emerging markets. Journal of Cleaner Production, 150, 135–147. https://doi.org/10.1016/j.jclepro.2017.02.180
  20. Habib, A. M. (2023). Do business strategies and environmental, social, and governance (ESG) performance mitigate the likelihood of financial distress? A multiple mediation model. Heliyon, 9(7), e17847. https://doi.org/10.1016/j.heliyon.2023.e17847Hair, J., Black, W., Babin, B. & Anderson, R. (2010). Multivariate Data Analysis. New Jersey: Pearson Prentice Hall.
  21. Hayes, A. F. (2018). Introduction to Mediation, Moderation, and Conditional Process Analysis: A Regression-Based Approach (Methodology in the Social Sciences), 2nd ed. The Guilford Press.
  22. Höck, A., Bauckloh, T., Dumrose, M., et al. (2023). ESG criteria and the credit risk of corporate bond portfolios. Journal of Asset Management, 24(7), 572–580. https://doi.org/10.1057/s41260-023-00337-w
  23. Jensen, M., & Meckling, W. (1976), Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
  24. Kalsie, A., & Shrivastav, S. M. (2016). Analysis of Board Size and Firm Performance: Evidence from NSE Companies Using Panel Data Approach. Indian Journal of Corporate Governance, 9(2), 148–172. https://doi.org/10.1177/0974686216666456
  25. Khan, H. (2010). The effect of corporate governance elements on corporate social responsibility (CSR) reporting. International Journal of Law and Management, 52(2), 82–109. https://doi.org/10.1108/17542431011029406
  26. Lee, D. D., & Faff, R. W. (2009). Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective. Financial Review, 44(2), 213–237. Portico. https://doi.org/10.1111/j.1540-6288.2009.00216.x
  27. Leftwich, R. W., Watts, R. L., & Zimmerman, J. L. (1982). Voluntary Corporate Disclosure: The Case of Interim Reporting. Journal of Accounting Research, 19, 50. https://doi.org/10.2307/2490984
  28. Li, Y., Gong, M., Zhang, X.-Y., et al. (2018). The impact of environmental, social, and governance disclosure on firm value: The role of CEO power. The British Accounting Review, 50(1), 60–75. https://doi.org/10.1016/j.bar.2017.09.007
  29. LSEG. (2023). LSEG ESG Scores. Available online: https://www.lseg.com/en/data-analytics/sustainable-finance/ESG-scores (accessed on 2 January 2024).
  30. Muchemwa, M., Padia, N., & Callaghan, C. (2016). Board composition, board size and financial performance of Johannesburg Stock Exchange companies. South African Journal of Economic and Management Sciences, 19(4), 497–513.
  31. Mutlu, C., Van Essen, M., Peng, M., et al. (2018). Corporate governance in China: a meta-analysis. Journal of Management Studies, 55(6), 943–979. https://doi.org/10.1111/joms. 12331 https://doi.org/10.1111/joms.12331
  32. Ntim, C. G. (2013). Board diversity and organizational valuation: unravelling the effects of ethnicity and gender. Journal of Management & Governance, 19(1), 167–195. https://doi.org/10.1007/s10997-013-9283-4
  33. Nuansa-Ard, W., Tongkong, S., & Boonyanet, W. (2023). The Informative Value of CG Code Voluntary Disclosure on Firm Performance When Moderated by External Auditors. WSEAS Transactions on Computer Research, 11, 316–329. https://doi.org/10.37394/232018.2023.11.29
  34. Nuwagaba, G., Nyende, F., & Namanya, D. (2021). Financing Options and Sustainable Small Business Growth in Uganda: An Optimal Model. International Business Research, 14(10), 85. https://doi.org/10.5539/ibr.v14n10p85
  35. O’Connell, V., & Cramer, N. (2010). The relationship between firm performance and board characteristics in Ireland. European Management Journal, 28(5), 387–399. https://doi.org/10.1016/j.emj.2009.11.002
  36. Quintiliani, A. (2022). ESG and Firm Value. Accounting and Finance Research, 11(4), 37. https://doi.org/10.5430/afr.v11n4p37
  37. Rastogi, S., Singh, K., & Kanoujiya, J. (2023). Firm’s value and ESG: the moderating role of ownership concentration and corporate disclosures. Asian Review of Accounting, 32(1), 70–90. https://doi.org/10.1108/ara-10-2022-0266
  38. Richardson, A. & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26(7–8), 597–616. https://doi.org/10.1016/S0361-3682(01)00025-3
  39. Saini, M., Aggarwal, V., Dhingra, B., et al. (2023). ESG and financial variables: a systematic review. International Journal of Law and Management, 65(6), 663–682. https://doi.org/10.1108/ijlma-02-2023-0033
  40. Shahid, M. N., Abbas, A., Latif, K., et al. (2020). The mediating role of board size, philanthropy and working capital management between basic corporate governance factors and firm’s performance. Journal of Asian Business and Economic Studies, 27(2), 135–151. https://doi.org/10.1108/jabes-07-2018-0050
  41. Shin, J., Moon, J. J., & Kang, J. (2023). Where does ESG pay? The role of national culture in moderating the relationship between ESG performance and financial performance. International Business Review, 32(3), 102071. https://doi.org/10.1016/j.ibusrev.2022.102071
  42. Sritanee, N. (2023). How does ESG affect listed family firms’ performance? Paper presented to the Stock Exchange of Thailand. 2023 SET Research Scholarship Project.
  43. Stock Exchange of Thailand (SET). (2023). SET ESG Academy. Available online: https://www.set.or.th/set-ESG-academy/home.html (accessed on 2 January 2024).
  44. Suttipun, M. (2022). ESG Performance and Corporate Financial Risk of the Alternative Capital Market in Thailand. Cogent Business & Management, 10(1). https://doi.org/10.1080/23311975.2023.2168290
  45. Suttipun, M., & Yordudom, T. (2022). Impact of environmental, social and governance disclosures on market reaction: an evidence of Top50 companies listed from Thailand. Journal of Financial Reporting and Accounting, 20(3/4), 753–767. https://doi.org/10.1108/jfra-12-2020-0377
  46. Tahmid, T., Hoque, M. N., Said, J., et al. (2022). Does ESG initiatives yield greater firm value and performance? New evidence from European firms. Cogent Business & Management, 9(1). https://doi.org/10.1080/23311975.2022.2144098
  47. Tao, J. (2023). Study on the impact of ESG performance on firm performance. SHS Web of Conferences, 165, 01016. https://doi.org/10.1051/shsconf/202316501016
  48. Vaidya, P. N. (2019). Board size and firm performance: A study on BSE 100 companies. Journal of Management, 10(3). https://doi.org/10.34218/jom.6.3.2019.013
  49. Wang, H., Shen, H., & Li, S. (2023). ESG performance and stock price fragility. Finance Research Letters, 56, 104101. https://doi.org/10.1016/j.frl.2023.104101
  50. Wu, S., Li, X., Du, X., et al. (2022). The Impact of ESG Performance on Firm Value: The Moderating Role of Ownership Structure. Sustainability, 14(21), 14507. https://doi.org/10.3390/su142114507
  51. Yang, A., Li, W., Teo, B. S. X., et al. (2023). The Impact of Financial Derivatives on the Enterprise Value of Chinese Listed Companies: Moderating Effects of Managerial Characteristics. International Journal of Financial Studies, 11(1), 2. https://doi.org/10.3390/ijfs11010002
  52. Yu, M. (2023). CEO duality and firm performance: A systematic review and research agenda. European Management Review, 20(2), 346–358. Portico. https://doi.org/10.1111/emre.12522
  53. Zhang, S. (2022). Firm Value and ESG Performance During the Covid-19 Pandemic. Advances in Economics, Business and Management Research. https://doi.org/10.2991/aebmr.k.220603.035


DOI: https://doi.org/10.24294/jipd.v8i7.4403

Refbacks

  • There are currently no refbacks.


Copyright (c) 2024 Sansanee Meeprom, Wachira Boonyanet, Supa Tongkong

License URL: https://creativecommons.org/licenses/by/4.0/

This site is licensed under a Creative Commons Attribution 4.0 International License.