Utilizing data from 367 Japanese companies from 2005 to 2019, this paper investigates the relationship between investor sentiment, corporate social performance (CSP), and financial performance (FP). The empirical results obtained from the panel fixed effects and instrumental variable regressions reveal a positive impact of firm-specific sentiment on future FP. Conversely, the market sentiment effect is mixed as it positively influences Tobin's Q but negatively influences the return on assets (ROA). The impact of CSP, measured by environmental, social, and governance (ESG) scores, on FP is similar to that of market sentiment. Specifically, we find that an effective ESG performance in the prior year, both the overall performance and the performance of the individual aspects, can escalate firm value but diminish firm profitability in the following year. We claim that the CSP–FP relationship weakens under the moderating influence of investor sentiment.
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