Can sustainability performance mitigate the negative effect of policy uncertainty on the firm valuation?

Asil Azimli · Kemal Çek

35 citations0/0 files storedSustainability Accounting Management and Policy Journal

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Corporate Social Responsibility Reporting Sustainable Finance and Green Bonds Corporate Identity and Reputation

Abstract

Purpose The purpose of this paper is to test if building reputation capital through environmental, social and governance (ESG) investing can mitigate the negative effect of economic policy uncertainty (EPU) on firms’ valuation. Design/methodology/approach This study uses an unbalanced panel of 591 financial firms between 2005 and 2021 from Canada, France, Germany, Italy, Japan, the United Kingdom (UK) and the USA. Ordinary least square method is used in the empirical tests. To alleviate a potential endogeneity problem, robustness tests are performed using the two-stage least square approach with instrumental variables. Findings The results of this paper show that sustainable reporting can offset the negative effect of EPU on the valuation of financial firms. Consistent with the stakeholder-based reputation-building hypothesis, sustainability performance may have an insurance-like impact on firms’ valuation during periods of high uncertainty. Practical implications According to the findings, during high policy uncertainty periods, investors accept to pay a premium for the stocks of the firms which built social capital through environmental and social investments. Accordingly, it is suggested that regulatory bodies and governments motivate firms to increase their stakeholder orientation to attain higher reputation capital. Social implications Managers can mitigate the negative impact of policy uncertainty on the value of their firms via building social capital, which will increase financial market stability in return, and portfolio investors may use such firms for portfolio optimization decisions. Originality/value To the best of the authors’ knowledge, this paper is one of the first to examine the mitigating role of ESG investing on EPU and firm valuation relationships for financial firms. Thus, this study provides new insights related to the impact of ESG performance on valuation during uncertain times.

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References

2016Measuring Economic Policy Uncertainty*1997THE CORPORATE SOCIAL PERFORMANCE-FINANCIAL PERFORMANCE LINK 1991Corporate Social Performance Revisited 2010Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting 2014The Impact of Corporate Sustainability on Organizational Processes and Performance 2013Corporate social responsibility and access to finance 2002Introduction 2017Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis

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