Non-linearity between ESG and Firm Value, Risk, and Performance: A Comparison of Developing and Developed Markets

Abstract

Purpose- This study examines the non-linearity in the relationship of ESG with firm-specific variables (firm value, risk, and performance). It also compares the findings of developing and developed markets to evaluate whether these relationships depend on the type of markets.

Study Design/methodology/approach- The study tests the data from an international sample divided into developed and developing markets. The sample comprises 585 companies from 11 countries, selected based on market capitalization. 8,052 unbalanced observations are collected from 2008 to 2021. Quantile regression is used to examine non-linearity.

Findings- The estimation outputs show that ESG demonstrates: (1) a non-linear relationship between firm risk and value in developed markets and a linear relationship in developing markets; and (2) a non-linear relationship in both developing and developed markets between firm performance. Finally, the study also shows evidence that the impact of ESG on firm value, risk, and performance in developing and developed markets is different.

Research Practical Implications- For policy-setting institutions, the practical implications of the study highlight the need for catering institutional settings and market conditions when setting standards or policies regarding ESG. Additionally, the non-linearity of ESG and firm risk in developing markets can impact ESG portfolios and investment strategies for investors.

Originality/value- Examination of non-linearity between ESG and firm specific factors has not been performed in a holistic manner. Additionally, a direct comparison between the developed and developing markets is also lacking in current literature. This study attempts to address these gaps.