How Do ESG Performance and Awareness Affect Firm Value and Corporate Overinvestment?

Author Name Denny IRAWAN (Australian National University) / OKIMOTO Tatsuyoshi (Visiting Fellow, RIETI)
Creation Date/NO. April 2021 21-E-033
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First draft: April 2021
Revised: February 2022


Examining the relationship between environmental, social, and governance (ESG) performance and firm value has attracted significant attention, as ESG investing has grown rapidly over the last decade. This study examines this issue by investigating how ESG awareness and performance influence firm value, as proxied by Tobin's Q. The results indicate that as global ESG awareness measured by the number of signatories of United Nations Principles for Responsible Investment (PRI) increases, firms with higher ESG performance are valued higher. Concerning firm investment, our results suggest that firms with better ESG performance have larger investment opportunities through higher Tobin's Q. Given these results, this study also investigates whether firms with higher ESG performance have a higher tendency to overinvest. The overall results find little evidence that ESG performance induces the firms' overinvestment behaviour for most of the sectors. Moreover, the results indicate that, as ESG awareness increases, the firms with higher ESG performance tend to overinvest less for some sectors.