Article2023

ESG-CFP relationship: exploring the moderating role of financial slack

Aanchal Singh · Subir Verma · Samik Shome

35 citations0/0 files storedInternational Journal of Emerging Markets

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Corporate Social Responsibility Reporting Auditing, Earnings Management, Governance Corporate Governance and Financial Management

Abstract

Purpose This study aims at examining the contentions of the agency theory by exploring the direct relationship between environmental, social and governance (ESG) disclosure score and corporate financial performance (CFP) from the years 2016–2020. It also tests for the adaptability of slack resources theory by testing this relationship in the presence of a moderating variable (financial slack). Design/methodology/approach The study relies on the data obtained from Bloomberg database of 112 companies belonging to different sectors. It employs the use of partial least square structure equation modelling (PLS-SEM) for carrying out the empirical analysis. Findings The results obtained show that there exists a negative relationship between ESG and CFP of the sample firms. These results lend support to the propositions of both the agency theory. Further, the financial slack in the organizations does not ensure a firm's responsible behavior. Research limitations/implications The paper provides important implications both from the perspective of managers as well as policymakers. The results of this study will aid the managers in reducing the instances of information asymmetry in the market, thereby tackling the issue of principle agent problems within an organization. From the policy marking perspective, the results of this study will help the regulatory authorities in implementing the necessary rules, regulations and laws that will ensure increased participation from the corporate sector in disclosing their sustainability-related information. Originality/value This study is one of its kind to explore the impact of a moderating variable on the ESG-CFP relationship in the context of an emerging economy. It also contributes to the present stream of literature by providing both a theoretical and empirical support to the propositions under consideration.

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References

1981Evaluating Structural Equation Models with Unobservable Variables and Measurement Error 1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2011PLS-SEM: Indeed a Silver Bullet 1997On Persistence in Mutual Fund Performance 1992The Cross-Section of Expected Stock Returns 1973Risk, Return, and Equilibrium: Empirical Tests 2003Corporate Social and Financial Performance: A Meta-Analysis 2016Using PLS path modeling in new technology research: updated guidelines

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