ESG PERFORMANCE AND FIRM VALUE: THE MODERATING ROLE OF OWNERSHIP CONCENTRATION

How to cite this paper: Srivastava, A., & Anand. (2023). ESG performance and firm value: The moderating role of ownership concentration. Corporate Ownership & Control, 20 (3), 169–179. https://doi.org/10.22495/cocv20i3art11


INTRODUCTION
The increasing awareness towards sustainability issues has resulted in firms disclosing more information on environmental, social, and governance (ESG) activities. The Governance and Accountability Institute's (2021) research reports that 92% of the S&P 500 companies published a sustainability report in 2020. This is a significant growth when compared to 20% of the S&P 500 companies publishing sustainability reports in 2011. ESG practices adoption and their disclosures benefit firms in various ways. Companies committed to sustainability could better mitigate ESG-related risks ( Thus, these activities benefit the environment, customers, society, and firms. ESG is gaining interest from many researchers as responsible-sustainable business practices are likely to be associated with a firm value (Aouadi & Marsat, 2018;Daugaard, 2020;Nekhili et al., 2021). Studies on the link between corporate social responsibility (CSR) and firm value has been evolving for decades (Carroll, 1991;Orlitzky et al., 2003;McWilliams & Siegel, 2001), but recent emphasis on responsible-sustainable practices and their reporting has attracted a renewed interest to understand the link between ESG and the firm performance (Gillan et al., 2021). Interestingly results of these investigations report both positive and negative associations between firm value and ESG performance making it inconclusive so far.
There are diverse arguments present in the literature supporting negative relationships (Groening & Kanuri, 2013) as well as positive relationships (Harjoto & Jo, 2015;Ferrell et al., 2016). For instance, studies that have noted a negative association between ESG scores and firm performance (Groening & Kanuri, 2013) argued that managers engage in ESG actions for their benefit (Barnea & Rubin, 2010). On the other hand, researchers who have found a positive association support the stakeholder theory (Albitar et al., 2020).
The purpose of this study is to substantiate the existing results with the argument that the principal causes of a dubious association between any two variables are due to some unobserved channels which moderate the direct relationship ( The moderation effect of OC on the link between ESG and firm value can be supported by the expropriation hypothesis. The expropriation hypothesis propounds that controlling shareholders influence management decisions (La Porta et al., 1999) and expropriate the rights of minority shareholders (Claessens et al., 2002) to maximise their profits. Large shareholders avoid investing in ESG activities as it does not fulfil their interests (Dam & Scholtens, 2013). Therefore, OC could result in particular ESG disclosures and can also influence decision-making on the ESG policies of firms (Dam & Scholtens, 2013). Hence, this paper proposes that the bi-directional link between ESG and the firm value noted in the literature is due to the moderation effect of OC.
The structure of this paper is as follows. Section 2 covers the literature review. Section 3 discusses the methodology. Section 4 presents the results. Section 5 provides a discussion of the results, and Section 6 concludes the paper. Based on the expropriation hypothesis, this study proposes that OC has a moderating rol in the ESG-firm value relationship because concentrated ownership can affect the transparency and disclosure levels, directly affecting the decisionmaking related to ESG investment, thus negatively impacting the firm value. This study elucidates the existing literature on ESG by exploring the role of OC as a moderator using a sample of global firms. Therefore, this paper proposes the following hypotheses:

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
H1: There is a positive and significant relationship between ESG performance and firm value.
H2: Ownership concentration (OC) has a negative moderation effect on the relationship between ESG score and firm value. Figure 1 shows OC within a conceptual framework representing its moderation effect.

RESEARCH METHODOLOGY
To analyse how OC moderates the link between ESG and firm value among global firms, accounting data and ESG-related scores have been collected from Refinitiv Eikon. There are 15,640 firm-year observations across 1,564 international firms in this sample between 2011 and 2020. Those firms are included in the sample which has balanced panel data for all variables employed in this study.
The sample includes firms across 46 developed and emerging countries and 11 GICS stock market sectors (The Global Industry Classification Standard) (Tables A.1

and A.2 in Appendix A).
In this study, Firm value is the dependent variable. Tobin's Q (TQ) has been used as the proxy for firm value in this study, which is widely used by various researchers ( The primary independent variable is the Refinitiv ESG score. Based on the information provided by companies in their annual reports, on their websites, through stock exchange filings, and in their CSR reports, Refinitiv Eikon 1 provides ESG scores to measure the ESG performance of a firm (Refinitiv, 2022). It produces a score between 0-100, where a higher score indicates better ESG performance.
Previous studies have used the Refinitiv Eikon ESG score as a proxy for ESG 1 Refinitiv Eikon provides ESG scores designed to quantify the relative ESG performance of a firm. The database covers ten main themes: 1) resource use, 2) emissions, 3) environmental product innovation, 4) workforce, 5) human rights, 6) community, 7) product responsibility, 8) management, 9) shareholders and 10) corporate social responsibility strategy. These ten themes are expressed in the three pillar scores (environmental, social, and governance) and the final ESG score, reflecting how well a company is doing in its ESG performance (Refinitiv, 2022). Firm value ESG performance measured using a single controlling shareholder (SCS) and HHI. Hirschman-Herfindahl Index is constructed in the same way as constructed in (Jiang et al., 2011) and is computed as the sum of squared shareholdings of the five largest shareholders: (2) where is the shareholding percentage of the five largest shareholders. HHI ranges from 0 to 1, and higher HHI reflects more concentrated ownership in a firm ( Aouadi and Marsat (2018), the firm characteristics reported to influence firm value are used as control variables. CASH is calculated by dividing total cash by total assets, LEVERAGE is calculated by dividing total debt by total assets, and FIRM SIZE is calculated as the natural log of total assets.
The H1 proposes that ESG-related scores (ESG, E, S, and G) positively affect firm value. Following regression models are developed to evaluate the link between firm value, ESG-related scores, and control variables: In H2 the paper proposes that OC has a moderating effect on the link between ESG score and firm value. OC and an interaction term are included in the primary model to evaluate this moderating effect:

RESULTS
Descriptive statistics are presented in The interaction term (ESG * OC) tests the moderation hypothesis, which is the crucial variable. Based on the negative coefficient of ESG * OC (β3 = -0.01 in the Model 3 and β3 = -0.013 in the Model 5), the average increase in firm value due to ESG is lower for firms with a high concentration of ownership when other factors are controlled. Hence, H2 is supported by the finding that the interaction between ESG and OC negatively impacts firm value.
The moderation effects of OC on the association between the E score and firm value, the S score and firm value, and the G score and firm value are also examined (Models 3 and 5 of Tables B.4-B.6). The interaction terms E * OC, S * OC and G * OC have negative coefficients, which are significant at 1%, respectively. In support of H2, the interaction between ESG-related scores and OC negatively impacts firm value. This finding suggests that the average increase in firm value due to the E score, S score and G score is lower for firms with high OC when other factors are controlled.
Previous studies suggest that reverse causality exists between ESG scores and firm performance (

DISCUSSION
The findings of this study corroborate the proposed hypotheses. The impact of E, S, and G scores have been examined separately from the comprehensive ESG score to ensure that any specific dimension does not drive these results because previous researchers (Duuren et al., 2016) found that investors may weigh these dimensions differently. The results of E, S and G scores corroborate the main findings. Furthermore, we perform an instrumental variables estimate to investigate whether these results are affected by endogeneity bias.
The results of this study illustrate that ESG scores have a significant positive impact on firm value. One reason might be that companies adopting sustainability practices have more efficient organizational processes and long-term orientation (

CONCLUSION
The top-down push on sustainability from the United Nations and regulators encourages firms to adopt responsible and sustainable practices. The move towards sustainability has resulted in growing recognition of accounting and reporting of firm performance using the triple bottom-line framework prioritizing impact on people and the planet equally to the firm's profitability. This has resulted in voluntary and mandatory disclosures on ESG performance. The three sub-indicators of the ESG index measure the firm's practices towards a sustainable environment, stakeholder relations, and corporate governance quality. The objective of this study is to investigate how ESG scores impact firm value in the presence of OC. The sample consists of 15,640 firm-year observations across 46 developed and emerging countries from 2011 to 2020. The results show that ESG positively affects firm value, and the interaction between ESG and OC has a negative impact. Different ESG-related scores are used, and the results are significant and consistent for all measures. The results are consistent for two different measures of OC and hold for 2SLS estimates to address the endogeneity issue between ESG score and firm value.
Based on these findings, it can be concluded that higher ESG scores enhance firm value. Higher ESG firms exhibit increased firm value than lower ESG firms. These results corroborate the previous findings and support the stakeholder theory. The investors and other major stakeholders are drawn to firms with better ESG, and this enhanced relationship will benefit firms in the long run through increased firm value. The positive association between ESG and firm value entails that firms should lay emphasis on ESG actions, even though the costs are related to such activities.
This study illuminates the mixed results of previous works on ESG-firm value association by taking into account the moderation effect of OC. Further results suggest that OC negatively moderates the relationship between ESG and firm value, supporting the entrenchment effect.
The expropriation hypothesis indicates that controlling shareholders' incentive to gain information for controlling corporate policies might cause information asymmetry that affects ESG decisions. ESG policies are likely to be affected by controlling owners for firms with concentrated ownership, which would ultimately adversely impact the firm value. Considering these findings, effective control mechanisms are necessary to protect minority shareholders' rights in firms with high OC because they can be prone to overinvesting in ESG activities and thus worsening financial performance. Furthermore, the results are essential for regulators and policymakers in assessing how ESG, with concentrated ownership structures, influence firm value. Regulators could examine the usefulness of ESG practices in firms with high OC since ESG could worsen financial performance in such firms due to the expropriation incentives. Governance policymakers will benefit from the results because it provides new insights into the critical role played by concentrated ownership. It is reasonable to infer that OC affects ESG performance and reporting.
The limitations of this current study have been discussed in this section. We have considered OC a negative moderator of the association between ESG and firm value. It is possible, however, that other factors, such as governance structures, play a role in this relationship, but these are not discussed in this study. Further studies can explore the role of these moderators. We analysed data from large global listed companies. Future research could address these limitations by investigating the relationship between private firms, small and medium-sized firms, and country-specific firms to generalise these findings. Additionally, future studies can examine OC and other governance mechanisms to determine how ESG interacts with firm value at the industry level.  (2)