Fatemi Et Al (2018) ESG Performance and Firm Value - The Moderating Role of Disclosure

Global Finance Journal 38 (2018) 45–64
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Global Finance Journal

journal homepage: www.elsevier.com/locate/gfj
ESG performance and firm value: The moderating role of

disclosure
Ali Fatemi a,⁎, Martin Glaum b, Stefanie Kaiser c
a
Greenleaf Advisors LLC and DePaul University, 1 East Jackson Boulevard, Suite 5500, Chicago, IL 60614, USA
b
WHU – Otto Beisheim School of Management, Burgplatz 2, 56179 Vallendar, Germany
c
Independent. Part of this research was carried out while Stefanie Kaiser was affiliated to WHU - Otto Beisheim School of Management
a r t i c l e i n f o a b s t r a c t
Article history: This study investigates the effect of environmental, social, and governance (ESG) activities and
Received 26 May 2016 their disclosure on firm value. We find that ESG strengths increase firm value and that weak-
Received in revised form 24 February 2017 nesses decrease it. ESG disclosure, per se, decreases valuation. But more importantly, we find
Accepted 4 March 2017
that disclosure plays a crucial moderating role by mitigating the negative effect of weaknesses
Available online 9 March 2017
and attenuating the positive effect of strengths.
© 2017 Elsevier Inc. All rights reserved.
JEL classification:
G30
G32
M41
Q51
Q56
Keywords:
ESG
CSR
Disclosure
Firm value
1. Introduction
In this paper, we investigate the interrelationship between a firm's strengths and weaknesses with regard to environmental, social,
and governance (ESG) factors, its ESG-related disclosure, and its valuation.1 In recent years, numerous studies have attempted to measure
the performance and valuation impact of ESG factors. A stream of this literature has also addressed the determinants of the firm's ESG
disclosure and the possible valuation effects of such disclosure. However, the question of how the value of the firm may be jointly affected
by ESG activities and the intensity of ESG-related disclosure remains largely unexplored. We hypothesize that the association between a
firm's ESG activities and its valuation is moderated by its disclosures related to those activities. However, the impact of disclosure in this
context is not ex ante clear. One might expect a positive effect insofar as disclosure reduces information asymmetries and helps investors
better understand the firm's ESG strengths or weaknesses. Alternatively, ESG disclosure may impair firm value if investors view such dis-
closure as “cheap talk” or “greenwashing”. Our findings indicate that disclosure effects differ for ESG strengths and for ESG concerns. More
precisely, while firms with ESG concerns benefit from ESG-related disclosure, firms with ESG strengths experience lower valuation effects
when they intensify their disclosure efforts.
⁎ Corresponding author.
E-mail addresses: afatemi@depaul.edu (A. Fatemi), martin.glaum@whu.edu (M. Glaum), stefanie.a.kaiser@gmail.com (S. Kaiser).
1
In this paper, we use the term ESG interchangeably with CSR (corporate social responsibility). Both terms are widely used in both the academic literature and in
corporate practice.
http://dx.doi.org/10.1016/j.gfj.2017.03.001
1044-0283/© 2017 Elsevier Inc. All rights reserved.
46 A. Fatemi et al. / Global Finance Journal 38 (2018) 45–64
The question of how ESG factors may affect a firm's financial performance and its value has been extensively investigated.
However, the resulting conclusions have been far from unanimous (see Clark & Viehs, 2014; Margolis, Elfenbein, & Walsh,
2009 for recent surveys of the literature). In early contributions, it was mostly taken as a given that environmental investments
or social responsibility activities that exceeded the legally binding minimum standards would entail additional costs and would
thus reduce firm value (e.g., Friedman, 1970). In fact, as Kim and Lyon (2015, p. 706) note, “the entire environmental regulatory
paradigm is built around the idea that firms must be forced to make environmental improvements, because they would otherwise
find them costly or unprofitable, and thus not undertake them on their own.” More recent contributions to the theory of the firm
regard ESG activities as having the potential to increase firm value (e.g., Fatemi, Fooladi, & Tehranian, 2015; Malik, 2015; Porter,
1991; Porter & Kramer, 2011; Porter & van der Linde, 1995; Roberts, 2004). For example, under the resource-based view of the
firm, environmentally or socially motivated activities can improve the management team's capabilities and the firm's potential
to attract qualified employees. Moreover, such activities can enhance the firm's reputation and strengthen its interactions with
its stakeholders (Branco & Rodrigues, 2006). Jensen (2002) has synthesized the competing propositions and proposed that “en-
lightened [long-term] value maximization” requires the firm to take into account the interests of all of its important constituent
groups (see also Fatemi & Fooladi, 2013; Serafeim, 2014). The empirical literature dealing with ESG's effects on financial perfor-
mance and on firm value does not produce unequivocal results either. However, while some studies have reported a negative as-
sociation or insignificant results (see Horvathova, 2010), a meta-analysis by Margolis et al. (2009) finds the overall effect to be
positive, though small and possibly decreasing over time (see also Orlitzky, Schmidt, & Rynes, 2003).
The academic debate notwithstanding, over the course of the last two decades many firms, especially large multinational ones,
have intensified their efforts to report on ESG matters in order to legitimate their behavior and improve their reputation. Accord-
ing to a study by KPMG (2011), in 1996 only 300 firms worldwide produced corporate social responsibility (CSR) reports. By
2014, this number had increased to N 7000 worldwide (Khan, Serafeim, & Yoon, 2016). While many firms have adopted the Global
Reporting Initiative (GRI) guidelines and, more recently, the framework suggested by the International Integrated Reporting Coun-
cil (IIRC, 2013, 2014), the extent and quality of ESG disclosure remain heterogeneous (Ioannou & Serafeim, 2016).
To assess the impact of ESG disclosure on firm value, it is important to recognize that ESG reporting can reflect various motives
beyond the obvious wish to emphasize firm strengths and play down weaknesses. Disclosure may be used to explain changes in
ESG policies or to repair a reputation damaged by, for example, acute environmental harm (Brown & Deegan, 1998; Cho & Patten,
2007). It may be a mere façade. A firm might even understate its ESG activities for fear of alienating investors. As we explain in
detail below, extant empirical research has failed to document a consistent relationship between the extent of a firm's ESG dis-
closure and its financial performance or valuation.
This paper focuses on the question of whether the association between a firm's ESG activities and its valuation is moderated by
its ESG-related disclosure. Our empirical analysis is based on data for 1640 firm-year observations for publicly traded U.S. firms for
the years 2006 to 2011. We utilize data on ESG strengths and ESG concerns as compiled and reported by KLD Research and An-
alytics as proxies for a firm's ESG performance, and we use Bloomberg's ESG disclosure score (DISC) as an indicator of the extent
of a firm's ESG disclosure. Taking into account the potential endogeneity of the firm's disclosure strategy, we employ a two-stage
least squares (2SLS) model. The first stage of the model is composed of three equations that describe the determinants of a firm's
disclosure of its ESG activities (DISC) and that describe the interactions of ESG disclosure with ESG strengths (STR*DISC) and ESG
concerns (CON*DISC). The second stage of the model is our main focus; it describes the relationship between firm value (TOBIN
Q), on the one hand, and ESG performance (STR, CON) and ESG disclosure (DISC), on the other hand. We also disaggregate the
relationship to examine the three dimensions of ESG scores: environmental, social, and governance factors.
Our main contribution to the literature is that we provide a link between two hitherto separate streams of research: studies
addressing the relationship between ESG performance and financial performance or firm value and those examining the determi-
nants and the value impact of ESG disclosure. We propose that the association between a firm's ESG performance and value is
moderated by its ESG-related disclosure. Our empirical investigation provides evidence in support of the moderating role of dis-
closure. More precisely, our results show that ESG disclosure helps the firm alleviate the negative valuation effects of concerns
regarding its ESG performance. Furthermore, we find that for firms with ESG strengths, disclosure is negatively related to firm
value. Finally, we find that when evaluating the relevance of disclosure, investors differentiate among the three components of
ESG scores with regard to the nature of their informational content.
The remainder of the paper is structured as follows. In the next section, we review the literature relevant to our work and
develop our predictions. Section 3 explains the research design. Sections 4 and 5 describe the sample and data and present the
results. Section 6 offers a summary and concluding remarks.
2. Related literature and predictions
2.1. Environmental, social, and governance factors (ESG)
The question of how ESG factors affect a firm's financial performance and, ultimately, its value has been the subject of conten-
tious debate. Rooted in neoclassical theory, the early understanding was that the relationship between ESG and financial perfor-
mance was uniformly negative (e.g., see Vance, 1975; Wright & Ferris, 1997). Friedman (1970) best summarizes this argument as
claiming that the maximization of owners' profits is the firm's only social responsibility. The underlying assumption is that the
payoffs of ESG activities do not exceed their costs. As Kim and Lyon (2015) note, a few recent papers (Fisher-Vanden &
Thorburn, 2011; Jacobs, Singhal, & Subramanian, 2010; Lyon, Lu, Shi, & Yin, 2013) continue to find that firms reporting
A. Fatemi et al. / Global Finance Journal 38 (2018) 45–64 47
engagement in environmentally friendly activities or winning green awards experience negative abnormal returns. Such evidence
suggests that investors punish the firm for what they perceive as costly investments.
More recently, however, it has been argued that socially responsible behavior may have a net positive impact on performance
and firm value (Fatemi et al., 2015; Malik, 2015). Within the framework of the stakeholder theory (Freeman, 1984), it can be ar-
gued that socially responsible behavior better satisfies the interests of nonowner stakeholders (e.g., debtors, employees, cus-
tomers, and regulators), allowing for more efficient contracting (Jones, 1995) and opening new paths to further growth and
risk reduction (Fatemi & Fooladi, 2013). Evaluating the issue from a strategic management perspective, Porter and Kramer
(2006, p. 2) similarly posit that “CSR can be much more than a cost, a constraint, or a charitable deed—it can be a source of op-
portunity, innovation, and competitive advantage.”
On the empirical front, a large body of literature has also dealt with the effects of ESG (CSR) factors. Various studies document
a positive association between ESG and nonfinancial performance measures, including process efficiency and reduced material and
energy consumption (Aras & Crowther, 2008; Porter & van der Linde, 1995; Russo & Fouts, 1997); motivating employees,
attracting them to the firm, and creating a bonding mechanism for them (Bhattacharya, Sen, & Korschun, 2008; Greening &
Turban, 2000; Moskowitz, 1972); fostering customer loyalty (Albuquerque, Durnev, & Koskinen, 2015; Ramlugun & Raboute,
2015); advertising effectiveness and brand reputation (Cahan, Chen, Chen, & Nguyen, 2015; Hsu, 2012; McWilliams & Siegel,
2001; Reverte, 2009); reduction of regulatory burden (Freeman, 1984; Neiheisel, 1995); product differentiation and reductions
in price sensitivity (Boehe & Cruz, 2010; Flammer, 2015); and overall customer satisfaction (Pérez & del Bosque, 2015; Sen &
Bhattacharya, 2001; Walsh & Bartikowski, 2013; Xie, 2014).
The relationship between ESG performance and financial performance, as well as valuation, has also been extensively exam-
ined. A number of these studies have found either a negative (e.g., Boyle, Higgins, & Ghon Rhee, 1997; Vance, 1975; also see
Brammer, Brooks, & Pavelin, 2006) or a nonsignificant association between ESG performance and financial performance or firm
value (e.g., Alexander & Buchholz, 1978; Aupperle, Carroll, & Hatfield, 1985; Horvathova, 2010; McWilliams & Siegel, 2000;
Renneboog, Horst, & Zhang, 2008a, 2008b). Others have found a positive association (e.g., Bajic & Yurtoglu, 2017; Dimson,
Karakas, & Li, 2015; Eccles, Ioannou, & Serafeim, 2014; Edmans, 2011; Fatemi et al., 2015; Ge & Liu, 2015; Krüger, 2015). Al-
Tuwaijri, Christensen, and Hughes (2004) deploy a structural equations model within which economic performance is a function
of environmental performance and controls; environmental performance is, in turn, determined by economic performance and
controls. Although they find a positive influence of environmental performance on economic performance, they do not find a sig-
nificant impact of economic performance on environmental performance.2 El Ghoul, Guedhami, and Kim (2015) evaluate the re-
lationship between ESG performance and firm value in 53 countries and find ESG performance to be positively related to firm
value, especially in countries with weaker market-supporting institutions. They therefore conclude that ESG activities mitigate
market failures associated with institutional voids. Finally, a meta-analysis by Margolis et al. (2009) concludes that, on balance,
extant results point to a positive association between ESG activities and both financial performance and firm value. More specif-
ically, Margolis et al. (2009) aggregate 251 individual empirical studies (214 manuscripts) and find a small positive mean effect
size of r = 0.133 (median r = 0.09, weighted r = 0.11).3 For a subset of 106 studies published since 1998, the mean effect size is
only 0.090 (median r = 0.063, weighted r = 0.092), suggesting that the relationship between ESG performance and financial per-
formance may actually have weakened over time.
2.2. ESG disclosure
As Ioannou and Serafeim (2016) report, the form and intensity of ESG (or CSR) reporting differ across firms. Many firms ad-
here to the Global Reporting Initiative (GRI) guidelines in reporting their ESG performance (Vigneau, Humphreys, & Moon, 2015).
More recently, the Initiative for Integrated Reporting (IIR) has attempted to set a standard with its international framework,
which was published in 2013 (Cheng, Ioannou, & Serafeim, 2014; Eccles et al., 2014; Reuter & Messner, 2015). In addition to
the conventional methods of making such disclosures, firms have been increasingly using nontraditional methods, including
websites and social media (e.g., Eberle, Berens, & Li, 2013; Holder-Webb, Cohen, Nath, & Wood, 2009; Reilly & Hynan, 2014).
Research on the extent and the quality of ESG reporting has, for the most part, been based on ratings and checklists developed
by individual researchers who manually collected the data from annual reports or corporate websites (e.g., Aerts, Cormier, &
Magnan, 2008; Cho, Roberts, & Patten, 2010). More recently, ESG disclosure ratings have also come from specialized commercial
information providers. One such example is the ESG score database compiled by Bloomberg and used in the present study.
One prerequisite to understanding the impact of ESG reporting, or disclosure, on a firm's financial performance and its valu-
ation is to recognize that reporting can reflect various motives. Under voluntary disclosure theory, developed by, among others,
Verrecchia (1983) and Dye (1985), it can be argued that a firm's ESG engagement is a predictor of its ESG reporting practices:
firms with a positive ESG performance would choose to report extensively on their ESG activities, and those with a negative
ESG performance would choose to report minimally. According to this framework, firms signal their ESG performance to distin-
guish themselves from poorer performers and thus avoid the consequences of adverse selection (Akerlof, 1970). This argument
2
Like our study, that of Al-Tuwaijri et al. (2004) investigates the interrelations among economic performance, environmental performance, and environmental dis-
closure. However, their study differs from our work in the functional form of the assumed relationships. Most importantly, in their model, environmental disclosure is
one of the dependent variables, but it does not have a direct relationship with economic performance. In contrast, we suggest that the relationship between a firm's ESG
activities and its valuation is moderated by its ESG-related disclosure.
3
For an older meta-analysis, see Orlitzky et al. (2003).
is supported by Cahan et al. (2015), who find that good ESG performance generates favorable publicity, and that firms with good
ESG performance realize a higher firm value (or lower cost of capital) only if they also have favorable media coverage.
Alternatively, it is possible that the firm would use ESG reporting to manage the public's perception by explaining changes in
its policies with regard to ESG matters. For example, it may intensify its disclosure in order to prevent, or alleviate, the negative
effects of acute environmental damages (or similar events) on its reputation and market value (Brown & Deegan, 1998; Cho &
Patten, 2007), or to restore its legitimacy (Campbell, Craven, & Shrives, 2003; Deegan, 2002). Companies could also use ESG dis-
closure as a mere façade (“cheap talk”), irrespectively of their true ESG performance (Cho, Laine, Roberts, & Rodrigue, 2015a). Fur-
thermore, a firm may attempt to seem more ESG conscious than it really is (“greenwashing”). It is also conceivable that managers
may have incentives not to publicize their environmental, charitable, or otherwise socially responsible investments if they fear
that investors may perceive these activities as unduly costly and detrimental to their interests. Consequently, a firm with a pos-
itive ESG performance may deliberately opt for a low level of ESG disclosure or even actively understate its ESG activities (“undue
modesty”,“brownwashing”; see Kim & Lyon, 2015).
Empirical research to date has produced mixed findings regarding the nature of the relationship between ESG performance
and ESG disclosure. Some earlier studies find no significant relationship between firms' ESG performance and the intensity of
their ESG disclosure (Freedman & Wasley, 1990; Ingram & Frazier, 1980; Wiseman, 1982). Others find a negative relationship be-
tween environmental performance and environmental disclosure (Hughes, Anderson, & Golden, 2001; Patten, 2002). More re-
cently, studies by Gelb and Strawser (2001), Al-Tuwaijri et al. (2004), Clarkson, Li, Richardson, and Vasvari (2008, 2011),
Dhaliwal, Li, Tsang, and Yang (2011), Lyon and Maxwell (2011), and Gao, Dong, Ni, and Fu (2016) report positive associations.
The inconclusive results may be attributable to problems with the method employed, measurement problems (particularly the
extent of ESG disclosure), sample selection, or a failure to control for other relevant factors (Patten, 2002). For example, as
Clarkson et al. (2008) note, some of what is captured in the disclosure indices used by these studies might be nondiscretionary.
Therefore, the negative relationship reported in some of these studies between ESG performance and the extent of ESG disclosure
might be explained by the additional regulatory disclosure requirements arising from emerging environmental problems.
The empirical evidence on the value relevance of ESG disclosure is not fully conclusive either (see Gray, Kouhy, & Lavers, 1995
for a survey of the earlier literature). Some studies find the relationship to be negative (e.g., de Villiers & van Staden, 2011; Ho &
Taylor, 2007), while others report it as positive (e.g., Clarkson, Fang, Li, & Richardson, 2013; Gamerschlag, Möller, & Verbeeten,
2011; Gao et al., 2016; Middleton, 2015). Research by Brammer and Pavelin (2006) and by Bouten, Everaert, and Roberts
(2012) suggests that different forms of disclosure that emphasize “soft” or “hard” information may have different motives and
can have different effects on firm value. Dhaliwal, Li, Tsang, and Yang (2014) examine the relationship between ESG disclosure
and the equity cost of capital in an international setting that includes 31 countries. They divide these countries into two groups
that are either more or less stakeholder-oriented. They generally find a negative association between ESG disclosure and the cost
of equity capital, and this relationship is more pronounced in stakeholder-oriented countries. Finally, in a baseline model, Plumlee,
Brown, Hayes, and Marshall (2015) find no significant association between the overall level of voluntary ESG disclosure and the
value of the firm, its component cash flows, or its cost of capital. However, after controlling for ESG performance and differenti-
ating between the nature (positive, negative, neutral) and the type (soft, hard) of ESG disclosures, they find that high-quality soft
disclosure is significantly associated with both the cash flows and the cost of capital components of firm value. Building upon the
findings and the insights of this literature, we now proceed to develop our model.
3. The theoretical model: the moderating role of ESG disclosure
We hypothesize that the value of the firm is affected jointly by its ESG activities and the intensity of its ESG-related disclosure.
More precisely, we argue that the association between a firm's ESG activities and its valuation is moderated by the disclosure re-
lated to such activities. Thus, our basic theoretical model is as follows:
0 1
ESG Performance;
Value of Firm ¼ f @ ESG Disclosure; A
ESG Performance ESG Disclosure
Given extant findings, we expect a positive association between the firm's ESG performance and its value. That is, holding ev-
erything else constant, we expect a positive relationship between ESG strengths and firm value and a negative relationship be-
tween ESG concerns and firm value. However, given that ESG disclosure can be driven by very different managerial motives,
and given the inconclusive findings of previous research, we do not form directional expectations regarding the first-order rela-
tionship between ESG disclosure and firm value or the interaction term(s) between ESG performance (strengths, weaknesses) and
ESG disclosure. Instead, we simply test the null hypotheses of no relationships.
Research design
Examining the impact of ESG performance, ESG disclosure, and the interaction of ESG performance and ESG disclosure on firm
value requires that we first address the possible endogeneity of ESG disclosure resulting from omitted variables or from simulta-
neity. If, for example, firm value affects ESG disclosure, then the latter will be correlated with the error term in a regression of
firm value on ESG disclosure, and the estimated coefficient will be biased and inconsistent. To take this potential endogeneity into
account, we use an instrumental variables approach (e.g., Eugster & Wagner, 2015; Hail, 2002; Jiao, 2010).
In our main analysis, we use three instrumental variables for our potentially endogenous variable of ESG disclosure (DISC).4 The first of
these is the existence of a CSR committee on the board of directors (CSRCOMM). Liao, Luo, and Tang (2015) and Peters and Romi (2014)
find that firms with a CSR committee are more likely to disclose their greenhouse gas emission information and have a higher quality of
such disclosure. Michelon and Parbonetti (2012) find that firms with a CSR committee disclose information on social issues more compre-
hensively. The evidence suggests that CSR committees play an important role in getting sustainability information to stakeholders.5 There-
fore, we expect our first instrumental variable to be highly correlated with ESG disclosure, thus satisfying the relevance requirement.
Peters and Romi (2015) find that the presence of a CSR committee does not affect firm value: for their sample, the market value of
firms with a CSR committee does not differ from the market value of those without a CSR committee. We therefore assume that our in-
strumental variable is unlikely to directly affect firm value, hence meeting the exogeneity condition (exclusion restriction).
Next, we use the dispersion of analysts' earnings forecasts (DISP) as an instrument. The disclosure literature contains much ev-
idence indicating that the level of disclosure is negatively associated with the dispersion of analysts' forecasts (e.g., Barron, Kile, &
O'Keefe, 1999; Hope, 2003; Lang & Lundholm, 1996). This is consistent with the intuition that disclosure reduces analysts' uncer-
tainty about forecasted earnings and differences in information among analysts. Focusing on ESG disclosure, Dhaliwal et al.
(2011) and Dhaliwal, Radhakrishnan, Tsang, and Yang (2012) document that analysts' forecast errors are lower for firms with better
CSR disclosure. Furthermore, Harjoto and Jo (2015) find that the dispersion of analysts' earnings forecasts is negatively associated
with mandated ESG activities (“legal CSR activities”, in their terminology) and positively associated with “normative” ESG activities.6
Given these findings, we assume that it is likely that the dispersion of analysts' earnings forecasts fulfills the instrument relevance
condition. Research on the association between analysts' forecast dispersion and firm value (or future returns) does not provide con-
clusive evidence. A number of studies find that higher analyst forecast dispersion is associated with higher current stock prices and
lower future returns (e.g., Diether, Malloy, & Scherbina, 2002; Johnson, 2004), while others report that higher dispersions are asso-
ciated with lower current stock prices and higher future returns (e.g., Anderson, Ghysels, & Juergens, 2005; Barron, Stanford, & Yu,
2009). Some studies find a nonmonotonic association (e.g., Doukas, Kim, & Pantzalis, 2006; Li & Wu, 2014), but others fail to find
any significant association (e.g., Brennan, Chordia, & Subrahmanyam, 1998; Hwang & Li, 2008; Li & Wu, 2014). Given the mixed ev-
idence, we cannot assert ex ante whether it is likely that our second instrument satisfies the exogeneity condition.7 In this instance,
we rely on the results of several postestimation tests to assess the appropriateness of the instruments.
Finally, for our third instrument, we use the concentration of a firm's stock ownership (OWNERCONC). Research has documented a
negative association between ownership concentration and the level of disclosure (for an overview, see, for example, Garcia-Meca &
Sanchez-Ballesta, 2010). Firms with few large shareholders (e.g., family-controlled firms) may have little motivation to disclose more in-
formation than the law requires because the demand for public disclosure is relatively weak. Large shareholders may obtain information
through means other than publicly disclosed reports; for example, they often have direct access to the board of directors. Focusing on CSR,
Brammer and Pavelin (2008), Reverte (2009), Bouten et al. (2012), Li, Luo, Wang, and Wu (2013) and Liao et al. (2015) find that firms
with more concentrated stock ownership have lower levels of disclosure. Hence, we expect the ownership concentration instrument to be
quite likely to meet the relevance condition. The evidence on the impact of ownership concentration on firm value is mixed. Some studies
document a positive association (e.g., Sraer & Thesmar, 2007; Villalonga & Amit, 2006), a few find a negative association (e.g., Anderson &
Reeb, 2004), others document a nonmonotonic association (e.g., Anderson & Reeb, 2003), and some find no significant association at all
(e.g., Perrini, Rossi, & Rovetta, 2008; Weiss & Hilger, 2012; Welch, 2003). Thus, we again rely on the results of the postestimation tests to
assess whether the exogeneity condition is satisfied for ownership concentration.
In specifying our model, we must further take into account the potential endogeneity of the interaction terms between ESG
disclosure and ESG performance. We differentiate between ESG strengths (STR) and ESG concerns (CON). Following
Wooldridge (2002), we use the interactions between ESG strengths (ESG concerns) and the instrumental variables for ESG disclo-
sure as instruments for the interaction terms between ESG strengths (ESG concerns) and ESG disclosure. Thus, our instrumental
variables approach consists of three first-stage regressions, one for each endogenous variable.8
DISC ¼ f ðCSRCOMM;
DISP; OWNERCONCÞ

STR DISC ¼ f STR CSRCOMM; STR DISP; STR OWNERCONC

CON DISC ¼ f CON CSRCOMM; CON DISP; CON OWNERCONC
4
In additional analyses, we also use an alternative approach with a different set of instrumental variables for the potentially endogenous variable ESG disclosure
(DISC); see the section on robustness checks below.
5
In addition, Peters and Romi (2015) document that the existence of a CSR committee on the board of directors increases the likelihood of adopting CSR report as-
surance services.
6
Legal CSR activities are activities undertaken to comply with laws and regulations covering labor rights and product safety, etc. Normative CSR activities include
activities undertaken in accordance with social norms, such as norms on charitable giving and work-life balance (see Harjoto & Jo, 2015).
7
It is often difficult to find variables that meet both the relevance and exogeneity conditions. Therefore, the search for and selection of instrumental variables is often
considered “magic” (Chenhall & Moers, 2007; Larcker & Rusticus, 2010).
8
Please note that when estimating our instrumental variables model using 2SLS estimation, we include all instruments as regressors in all first-stage regressions. The
theory of 2SLS estimation does not allow designations of instrumental variables to specific endogenous variables (Baum, 2006; Cameron & Trivedi, 2010). For ease of
reading, however, we do not show all instruments in all first-stage regression equations, either here or in the following section.
To assess whether our instrumental variables satisfy the relevance condition and the exogeneity condition (exclusion restric-
tion), we rely on several postestimation test statistics. We report Angrist-Pischke's Partial F-statistic (Angrist & Pischke, 2009) and
Shea's Partial R2 (Shea, 1997) and the results for tests of underidentification, weak identification, and overidentification.
To complete our model, we add several control variables that the literature has identified as influencing ESG disclosure, ESG perfor-
mance, and firm value (e.g., Cho & Patten, 2007; Clarkson et al., 2008; Jiao, 2010; Jo & Harjoto, 2011; Peters & Romi, 2014). These variables
include proxies for firm profitability (return on assets, ROA) and growth of return on assets (ROAGROWTH), firm size (natural logarithm
of sales, LNSALES), asset intensity (ratio of assets to sales, ASSETSSALES), leverage (ratio of debt to equity, LEV), advertising intensity (ad-
vertising expenditures scaled by sales, ADVERT), research and development intensity (R & D expenditures scaled by sales, R&D), and asset
age (ratio of net property, plant, and equipment to gross property, plant, and equipment, NETGROSSPPE). Additionally, we include two
dummy variables that assume a value of 1 if figures for advertising expenditures or for research and development expenditures are not
available (ADVERTMISSING, R&DMISSING). Furthermore, we include industry- and year-fixed effects. Appendix A provides more detail
on the definitions of the variables and how they are calculated.
Thus, our two-stage model is as follows.
First stage9:
DISCi;t ¼ α0 þ β1 CSRCOMMi;t þ β2 DISPi;t þ β3 OWNERCONCi;t þ β4 STRi;t þ β5 CONi;t

þ β6 ROAi;t þ β7 ROAGROWTHi;t þ β8 LNSALESi;t þ β9 ASSETSSALESi;t þ
ð1Þ
β10 LEVi;t þ β11 ADVERTi;t þ β12 ADVERTMISSINGi;t þ β13 R&Di;t þ
β14 R&DMISSINGi;t þ β15 NETGROSSPPEi;t þ INDUSTRYi;t þ YEARi;t þ εi;t

STR DISCi;t ¼ α0 þ β1 STR CSRCOMMi;t þ β2 STR DISPi;t þ β3 STR OWNERCONCi;t þ
β4 STRi;t þ β5 CONi;t þ β6 ROAi;t þ β7 ROAGROWTHi;t þ β8 LNSALESi;t þ
β9 ASSETSSALESi;t þ β10 LEVi;t þ β11 ADVERTi;t þ β12 ADVERTMISSINGi;t þ ð2Þ
β13 R&Di;t þ β14 R&DMISSINGi;t þ β15 NETGROSSPPEi;t þ
INDUSTRYi;t þ YEARi;t þ εi;t

CON DISCi;t ¼ α0 þ β1 CON CSRCOMMi;t þ β2 CON DISPi;t þ β3 CON OWNERCONCi;t
þ β4 STRi;t þ β5 CONi;t þ β6 ROAi;t þ β7 ROAGROWTHi;t þ β8 LNSALESi;t þ
β9 ASSETSSALESi;t þ β10 LEVi;t þ β11 ADVERTi;t þ β12 ADVERTMISSINGi;t ð3Þ
þ β13 R&Di;t þ β14 R&DMISSINGi;t þ β15 NETGROSSPPEi;t þ
INDUSTRYi;t þ YEARi;t þ εi;t
Second stage:

TOBINQ i;t ¼ α0 þ β1 DISCi;t þ β2 STRi;t þ β3 STR DISCi;t þ β4 CONi;t þ β5 CON DISCi;t þ
β6 ROAi;t þ β7 ROAGROWTHi;t þ β8 LNSALESi;t þ β9 ASSETSSALESi;t þ
ð4Þ
β10 LEVi;t þ β11 ADVERTi;t þ β12 ADVERTMISSINGi;t þ β13 R&Di;t þ
β14 R&DMISSINGi;t þ β15 NETGROSSPPEi;t þ INDUSTRYi;t þ YEARi;t þ εi;t
4. Data and sample
To operationalize our model, in accord with the approach taken by other researchers (e.g., Aktas, De Bodt, & Cousin, 2011;
Cornett, Erhemjamts, & Tehranian, 2016; Harjoto & Jo, 2015; Plumlee et al., 2015), we use data compiled by KLD Research and
Analytics as a proxy for ESG activities. KLD divides a firm's CSR activities into 13 categories: community, diversity, employment,
environment, human rights, product, alcohol, gaming, firearms, military, nuclear, tobacco, and corporate governance. It then com-
piles and reports the number of strengths and concerns for each category. In this study, we use these measures of strengths and
weaknesses as our proxy for a firm's CSR activities.
We use Bloomberg's measure of ESG disclosure, first made available in 2009, as a proxy for disclosure. To our knowledge, this
constitutes one of the first uses of Bloomberg's index in an academic study. Bloomberg currently compiles approximately 300 data
points from each of approximately 11,000 companies in 63 countries. Screening publicly available sources, Bloomberg assesses the
extent of each firm's disclosure of its environmental, social, and governance (ESG) activities. Bloomberg's data points, which are
weighed by importance, come from company filings, such as CSR reports, annual reports, and corporate websites, and thus reflect
the universe of information publicly available to investors. Depending on the data points collected, and tailoring its reports to the
industry, Bloomberg then estimates disclosure scores ranging between 0.1 (lowest) and 100 (highest).10
9
As we note above, for the sake of brevity, we do not show all instruments in all our first-stage regression equations, either here or in the following section (see footnote 8).
10
These ratings are widely used by investors and are perceived to be credible by sustainability professionals (see, for example, SustainAbility at http://www.
sustainability.com/company). Eccles, Krzus, Rogers, and Serafeim (2012) document investors' use of Bloomberg's ESG ratings over a six-month span ranging from
2010 to 2011. They show that data on firms' aggregate ESG disclosure scores have been widely consulted.
Table 1
Sample composition by year and industry.
Panel A: composition by year
2006 87
2007 227
2008 287
2009 326
2010 352
2011 361
Total 1640
Panel B: composition by industry
Agriculture & forestry 25

Mining & construction 165
Manufacturing 771
Transportation & utilities 318
Wholesale & retail 107
Services 254
Total 1640
We match the available data for all U.S. firms from KLD and Bloomberg, our two primary data sources. Because there are few
disclosure scores for years before 2006 and limited data from our supplemental sources (Worldscope, Thomson One and I/B/E/S;
see Appendix A for details), we net a total of 1640 firm-year observations for 403 U.S. listed companies for reporting periods be-
tween 2006 and 2011. Table 1 shows the composition of our sample by year (Panel A) and by industry (Panel B).
Table 2 presents the descriptive statistics of the variables. All continuous variables are winsorized at the 1% and 99% percen-
tiles. The mean value of Tobin's q is 1.88 (median 1.56), with a standard deviation of 1.00. The mean ESG disclosure of the firms is
22.28 (median 16.12), with a standard deviation of 12.74. The mean value of KLD strengths is 3.36 (median 2.0) with a standard
deviation of 3.82, and concerns have a mean value of 3.66 (median 3.0) with a standard deviation of 2.46. These values appear
reasonable because they fall within the bounds of estimates reported in previous work on this topic. Among our instrumental var-
iables, 41.22% of our sample firms operate with standing sustainability committees. The mean value of the standard deviation of
analysts' six-months-forward earnings forecasts is 13.46% (median 7%), with its own standard deviation at 20.5%. The mean value
for the largest block of shares held by a single shareholder is 11.8% (median 9.3%), with a standard deviation of close to 12%. Fi-
nally, the average values of our control variables also appear to be reasonable, with ROA at 8%, natural log of sales at 8.5, assets to
sales at 2.1, debt to equity at 45%, advertising expenses at 2.3% of sales, R&D expenditures at 2.85% of sales, and the ratio of net
property, plant, and equipment to gross PPE at 53%.
Table 3 reports the cross-correlations of the variables. We note that Tobin's q is positively correlated with ROA, advertising in-
tensity, and R&D intensity. It is negatively correlated with ESG concerns, natural log of sales, asset intensity, debt to equity ratio,
asset age, and each of the two dummy variables that signify missing values for advertising and R&D expenditures of the firm. ESG
strengths are positively correlated with ESG concerns, ROA, natural log of sales, advertising intensity, and R&D intensity. They are
negatively correlated with asset intensity, age of assets, debt to equity ratio, and each of the two dummy variables that signify
missing values for advertising and R&D expenditures. ESG concerns are positively correlated with natural log of sales, debt to eq-
uity ratio, and the dummy variable that signifies a missing value for advertising expenses. They are negatively correlated with
Table 2
Descriptive statistics.
Mean Standard deviation Percentile 25 Median Percentile 75
TOBINQ 1.8819 1.0010 1.2183 1.5639 2.1538

DISC 22.2769 12.7422 13.2200 16.1200 29.2050
CSRCOMM 0.4122 0.4924 0.0000 0.0000 1.0000
DISP 0.1346 0.2048 0.0400 0.0700 0.1400
OWNERCONC 11.7808 11.9586 6.9000 9.3000 12.4000
STR 3.3610 3.8158 1.0000 2.0000 5.0000
CON 3.6640 2.4577 2.0000 3.0000 5.0000
ROA 0.0838 0.0588 0.0436 0.0713 0.1086
ROAGROWTH -0.0002 1.4716 -0.2623 -0.0205 0.1655
LNSALES 8.5089 1.1905 7.6170 8.4852 9.3745
ASSETSSALES 2.1030 2.1440 0.9642 1.4156 2.4356
LEV 0.4516 0.5980 0.1030 0.4006 0.5915
ADVERT 0.0232 0.0673 0.0000 0.0000 0.0024
ADVERTMISSING 0.7250 0.4467 0.0000 1.0000 1.0000
R&D 0.0285 0.0594 0.0000 0.0000 0.0254
R&DMISSING 0.5604 0.4965 0.0000 1.0000 1.0000
NETGROSSPPE 0.5337 0.1559 0.4066 0.5316 0.6522
Note: Variables are defined as in Appendix A. The continuous variables are winsorized at the 1st and 99th percentiles.
52
Table 3
A. Fatemi et al. / Global Finance Journal 38 (2018) 45–64

Correlations.
TOBINQ DISC STR CON ROA ROA GROWTH LN SALES ASSETS SALES LEV ADVERT ADVERTMISSING R&D R&D MISSING NET GROSS PPE
TOBINQ −0.0226 0.0107 −0.1250 0.6789 0.1342 −0.1310 −0.3384 −0.7184 0.2698 −0.2551 0.3135 −0.2692 −0.2362
DISC −0.0451 0.6124 0.3317 0.0241 0.0196 0.5136 −0.0896 0.0145 0.0719 −0.0791 0.1704 −0.1958 −0.0878
STR 0.0015 0.6351 0.2926 0.0630 0.0300 0.6147 −0.0874 −0.0163 0.1695 −0.1673 0.2511 −0.2480 −0.1496
CON −0.1311 0.3258 0.3617 −0.0375 0.0019 0.5358 −0.0383 0.1456 −0.1090 0.1088 −0.0568 0.0007 0.0669
ROA 0.7253 0.0293 0.0815 −0.0465 0.3040 0.0480 −0.4405 −0.5969 0.1707 −0.1635 0.2308 −0.2238 −0.2128
ROAGROWTH 0.0322 0.0207 0.0173 −0.0173 0.0903 0.0666 −0.0634 −0.0836 0.0154 −0.0140 0.0081 −0.0135 −0.0303
LNSALES −0.1640 0.4945 0.6062 0.5713 −0.0108 0.0269 −0.3020 0.0963 −0.0122 0.0033 0.0608 −0.1207 −0.0906
ASSETSSALES −0.2569 −0.1171 −0.1207 −0.0931 −0.3319 −0.0327 −0.2984 0.3610 −0.1476 0.1538 −0.1684 0.2453 0.4721
LEV −0.3977 −0.0538 −0.0678 0.0592 −0.3895 0.0248 0.0255 0.3889 −0.3123 0.3054 −0.4082 0.3373 0.2968
ADVERT 0.3030 −0.0012 0.0979 −0.0997 0.1761 0.0147 −0.0815 −0.0708 −0.1574 −0.9831 0.2908 −0.2428 −0.2508
ADVERTMISSING −0.2496 −0.1116 −0.1866 0.0781 −0.1682 −0.0004 −0.0094 0.0707 0.1830 −0.5612 −0.2750 0.2304 0.2468
R&D 0.2134 0.1028 0.1678 −0.1270 0.1052 0.0126 −0.1098 −0.0916 −0.2494 0.3004 −0.2450 −0.9470 −0.4050
R&DMISSING −0.1486 −0.1697 −0.2701 −0.0391 −0.1435 0.0014 −0.1250 0.2932 0.2775 −0.2093 0.2304 −0.5416 0.4299
NETGROSSPPE −0.1553 −0.0498 −0.1646 0.0345 −0.1647 −0.0108 −0.1104 0.4010 0.2670 −0.1842 0.2498 −0.1660 0.4197
Note: Pearson (Spearman) correlation coefficients are presented below (above) the diagonal line. Bold numbers denote correlations significant at least at the 5% level. Variables are defined as in Appendix A.
Table 4
Instrumental variable regression results.
First Stage First Stage First Stage Second Stage

DISC STR*DISC CON*DISC TOBINQ
CSRCOMM 5.5812*** −27.2802*** −26.7078***

(3.80) (−2.91) (−3.35)
(0.000) (0.004) (0.001)
DISP −5.7493 −22.5013 −62.8658**
(−1.45) (−1.10) (−2.47)
(0.147) (0.274) (0.014)
OWNERCONC −0.1574*** −0.6066** −0.5226
(−4.33) (−2.23) (−1.53)
(0.000) (0.026) (0.128)
DISC −0.0182**
(−2.08)
(0.038)
STR 1.0246*** 31.7633*** 3.8882*** 0.0739*
(3.77) (8.76) (3.71) (1.91)
(0.000) (0.000) (0.000) (0.056)
STR*DISC −0.0017*
(−1.84)
(0.066)
STR*CSRCOMM 0.1556 12.1597*** 1.2461
(0.76) (5.38) (1.24)
(0.448) (0.000) (0.217)
STR*DISP 1.5990** 0.9630 8.8283***
(2.44) (0.16) (2.77)
(0.015) (0.871) (0.006)
STR*OWNERCONC 0.0240*** 0.0920 0.1079***
(3.61) (0.78) (3.21)
(0.000) (0.437) (0.001)
CON −0.0602 −2.4563 19.5712*** −0.0810**
(−0.20) (−1.30) (8.62) (−2.07)
(0.845) (0.196) (0.000) (0.039)
CON*DISC 0.0031**
(2.25)
(0.024)
CON*CSRCOMM −0.5894* −3.1584 9.0636***
(−1.84) (−1.54) (3.86)
(0.067) (0.125) (0.000)
CON*DISP 0.8600 7.8676 11.2842
(0.95) (1.46) (1.59)
(0.342) (0.145) (0.113)
CON*OWNERCONC 0.0201** 0.1216** 0.7292
(2.17) (2.17) (0.73)
(0.030) (0.030) (0.464)
ROA −0.5542 27.5021 13.9996*** 11.2647***
(−0.08) (0.51) (3.71) (15.10)
(0.939) (0.609) (0.000) (0.000)
ROAGROWTH 0.1277 −0.0701 0.6031 −0.0195*
(0.98) (−0.07) (1.09) (−1.66)
(0.329) (0.945) (0.278) (0.097)
LNSALES 1.5235*** 1.6365 3.9739 −0.1173***
(2.87) (0.45) (1.58) (−3.11)
(0.004) (0.653) (0.115) (0.002)
ASSETSSALES −0.3120* −1.2681 −0.3564 −0.0431***
(−1.88) (−1.19) (−0.42) (−2.99)
(0.061) (0.236) (0.677) (0.003)
LEV −1.0520* −1.2066 −6.7594* −0.1125***
(−1.95) (−0.37) (−1.94) (−2.63)
(0.051) (0.715) (0.053) (0.009)
ADVERT −10.0060 −79.1828 −52.0662** 1.0489*
(−1.56) (−1.61) (−2.14) (1.93)
(0.120) (0.108) (0.033) (0.054)
ADVERTMISSING −0.9892 −5.8204 −4.6496 −0.1214*
(−0.89) (−0.72) (−0.84) (−1.70)
(0.374) (0.470) (0.401) (0.089)
R&D 13.6443 72.1738 69.4125* 1.3761**
(0.98) (1.06) (1.81) (1.97)
(0.327) (0.292) (0.071) (0.048)
R&DMISSING −0.2860 1.0478 −0.4935 −0.0987
(continued on next page)

Table 4 (continued)
First Stage First Stage First Stage Second Stage

(−0.20) (0.11) (−0.06) (−1.31)

(0.840) (0.909) (0.951) (0.192)
NETGROSSPPE 1.9493 15.1231 2.4867 0.0969
(0.67) (0.82) (0.18) (0.53)
(0.502) (0.410) (0.855) (0.594)
CONST 5.7930 −23.3059 −30.3238 2.5902***
(1.08) (−0.71) (−1.24) (7.93)
(0.282) (0.479) (0.216) (0.000)
INDUSTRY Included Included Included Included
YEAR Included Included Included Included
F-stat 22.55*** 55.48*** 45.65*** 26.94***
Adj. R2 51.36% 86.59% 79.72% 60.21%
Angrist-Pischke Partial F-stat 6.15*** 6.93*** 4.60***
Shea Partial R2 16.45% 14.06% 18.76%
Kleibergen-Paap rk LM statistic 25.5220***
χ2 (p-value) (0.000)
Kleibergen-Paap rk Wald F statistic 13.830
(crit. value at 10% max. IV relative bias) (9.37)
Anderson-Rubin Wald test χ2 (p-value) 17.25**
(0.0449)
Hansen J statistic χ2 (p-value) 7.6860
(0.2621)
N 1640 1640 1640 1640
Note: *** (**, *) denotes significance at the 1% (5%, 10%) level (two-sided test). t-statistics and p-values are given in parentheses. Variables are defined as in Ap-
pendix A.
Columns 1 to 3 present the estimation results for the three first-stage regressions for the three endogenous regressors, i.e., ESG disclosure (DISC), the interaction
between ESG strengths and ESG disclosure (STR*DISC), and the interaction between ESG concerns and ESG disclosure (CON*DISC). The existence of a CSR commit-
tee (CSRCOMM), analyst forecast dispersion (DISP), and ownership concentration (OWNERCONC) are used as instruments for the endogenous regressor ESG dis-
closure (DISC); the interactions among these three instruments and ESG strengths (ESG concerns) are used as instruments for the endogenous regressor STR*DISC
(CON*DISC). Column 4 presents the estimation results for the second-stage regression for the dependent variable, i.e., firm value (TOBINQ): TOBINQi,t = α0 + β1-
DISCi,t + β2STRi,t + β3STR*DISCi,t + β4CONi,t + β5CON*DISCi,t + Controls, where DISC is instrumented by CSRCOMM, DISP, and OWNERCONC; STR*DISC is instru-
mented by STR*CSRCOMM, STR*DISP, and STR*OWNERCONC; and CON*DISC is instrumented by CON*CSRCOMM, CON*DISP, and CON*OWNERCONC.
asset intensity, advertising intensity, and R&D intensity. Finally, ESG disclosure scores are positively correlated with ESG strengths,
ESG concerns, natural log of sales, and R&D intensity. They are negatively correlated with asset intensity, debt to equity ratio, asset
age, and each of the two dummy variables that signify missing values of advertising and R&D expenses.
5. Empirical results and discussion
5.1. ESG performance, ESG disclosure, and firm value
Table 4 presents the estimated results for our 2SLS model. The first three columns of Table 4 show the results for the first-
stage regressions investigating the determinants of ESG disclosure and those of the interaction between ESG disclosure and
ESG strengths and ESG concerns. The last column of Table 4 shows the results for the second-stage regression, which examines
the influence of ESG performance, ESG disclosure, and the interaction between ESG performance and ESG disclosure on firm
value. These and the following analyses are based on panel data. Because our dataset contains more firms than years, following
Petersen (2009), we include dummy variables for each time period to capture the possible correlation of same-year observations
belonging to different firms, and we use standard errors clustered by firm to control for the possible correlation between same-
firm observations belonging to different years. These standard errors are robust to heteroskedasticity, according to White (1980).
We note that our model is not underidentified: the Kleibergen-Paap rk LM statistic (Kleibergen & Paap, 2006) is highly signif-
icant (p b 0.001). Additionally, the following test statistics indicate that our instrumental variables are relevant and strong. First,
the Kleibergen and Paap (2006) rk Wald F-statistic is higher (13.83) than the critical value (9.37) at a 10% maximal IV relative
bias. Second, the Angrist-Pischke Partial F-statistic is highly significant for all first-stage regressions (p b 0.001). Third, Shea's Par-
tial R2 is between 14% and 19%, indicating that our instrumental variables explain a reasonable portion of the variation of ESG
disclosure and the variations of the interactions between ESG activities and ESG disclosure. Further, Hansen J, the overidentifica-
tion test statistic (Hansen, 1982), is insignificant (p = 0.2621). Thus, our instruments satisfy the exogeneity condition (exclusion
restriction).11 Furthermore, the Anderson-Rubin Wald test (Anderson & Rubin, 1949; Chernozhukov & Hansen, 2008) is significant
at the 5% level, suggesting that our endogenous variables influence firm value even in the presence of weak instruments.
11
Instead of the Anderson LM statistic, the Cragg-Donald Wald F-statistic, and the Sargan statistic, we report the Kleibergen-Paap rk LM statistic, the Kleibergen-Paap
rk Wald F-statistic, and the Hansen J statistic, as those statistics remain valid in the presence of heteroskedasticity.
The results reported in Table 4 indicate that the presence of a sustainability committee within the firm is a significant deter-
minant in all three first-stage regressions designed to explain disclosure (DISC), the interaction between disclosure and ESG
strengths (STR*DISC), and the interaction between disclosure and ESG concerns (CON*DISC). Ownership concentration is a signif-
icant determinant in two regressions (those of DISC and STR*DISC), and the dispersion of analysts' earnings forecasts is a signif-
icant determinant only in one regression (that of CON*DISC). The results suggest that the existence of a sustainability committee
increases ESG disclosure (DISC), and ownership concentration decreases it. Sustainability committees increase disclosure in the
presence of both ESG strengths (STR*DISC) and ESG concerns (CON*DISC).
Finally, turning to the second-stage regression, our model explains approximately 60% of the variance of Tobin's q. The results
indicate that ESG strengths significantly increase firm value and that ESG concerns significantly decrease it. ESG disclosure signif-
icantly decreases firm value.
Our main interest lies in the estimates of β3 and β5, the regression coefficients of the interaction terms STR*DISC and
CON*DISC, which measure the moderating effect of ESG disclosure on the association between ESG strengths and concerns and
firm value. The β3-estimate is significantly negative, albeit only at the 10% level (p = 0.066). This indicates that the generally neg-
ative valuation effect of ESG disclosure is exacerbated for firms with positive ESG performance. One possible explanation is that, if
the firm has ESG strengths, high disclosure may signal that the firm is overinvesting in ESG (see also Kim & Lyon, 2015 on this
point). An equally plausible explanation is that investors may perceive the firm as attempting to cover up for a lack of depth
in its ESG actions with “too much talk.” The extent of ESG-related disclosure is correlated more strongly with ESG strengths
than it is with ESG concerns. As Table 3 shows, the Pearson correlation coefficient for DISC and STR is 0.6351 (p b 0.0001), but
the correlation coefficient for DISC and CON is only 0.3258 (p b 0.0001). Therefore, firms might find it fruitful to exercise restraint
in their disclosures related to ESG strengths and devote more of their efforts to explaining and contextualizing ESG concerns.
Fig. 1a illustrates the interaction between ESG strengths and ESG disclosure. It shows the conditional effects revealed by our
instrumental variable regressions of Tobin's q on ESG strengths and the control variables. We separate our sample into firms
with high (i.e., above-median) and low (i.e., below-median) ESG disclosure, and we estimate the instrumental variable model sep-
arately for each of the two subsamples. Conditional predictions are generated using the parameter estimates of the regression co-
efficients. To generate these predictions, we set the control variables to their relevant subsample medians, and we exclude both
the industry and year indicator variables. The resulting graph illustrates the moderating effect of the disclosure by showing that
the positive slope of the regression equation is higher for the low-disclosure subsample than it is for the high-disclosure subsam-
ple. Therefore, it appears that the positive association between ESG strengths and firm value is more pronounced for firms that
disclose less.
In Table 4, the β5-estimate is significantly positive (p = 0.024), indicating that in the presence of ESG concerns, higher ESG
disclosure increases valuation. Thus, it appears that more extensive disclosure tends to alleviate the valuation decrease associated
with ESG concerns. Fig. 1b illustrates this moderating effect. Through a process identical to that explained for Fig. 1a above, the
graph shows that the negative slope of the regression equation is much less steep for the high-disclosure subsample than it is
for the low-disclosure subsample. Therefore, it follows that the negative impact of ESG concerns on firm value is much less pro-
nounced for firms that disclose more. One possible explanation is that by properly framing the appropriateness of its operations
and its ESG policies, the firm succeeds in its efforts to legitimate its behavior and to affect investor expectations. Alternatively, the
firm may convince investors that it has made credible commitments to overcome ESG weaknesses in the future (e.g., it may
showcase convincing plans to reduce the externalities generated by its operations or to better comply with regulations).
Among the control variables, Tobin's q is increased by ROA and R&D intensity (and less significantly by advertising intensity).
It is decreased by firm size (as proxied by natural log of sales), asset intensity, and financial leverage (and less significantly by
growth in ROA and the dummy variable signifying missing values of advertising expenses).
A closer examination indicates that for the average firm in our sample, ESG strengths and concerns exert economically mean-
ingful valuation effects. According to the KLD data, the median firm in our sample has two ESG strengths (mean: 3.3610) and
three ESG concerns (mean: 3.6640). Taken at face value, the estimation results indicate that, with everything else constant, and
in the absence of any ESG-related disclosure, adding another strength would, on average, increase Tobin's q by 7.39%. Similarly,
an incremental concern would, on average, decrease it by 8.1%. To gain a complete picture of the valuation impact of ESG
strengths and concerns, we also need to take into account the moderating effects of ESG-related disclosure. The median firm in
our sample has a Bloomberg ESG disclosure rating of 16.12 (mean: 22.2769).12 Hence, considering the moderating effects of dis-
closure, a median firm that adds another ESG strength would increase valuation by just 4.65% (+0.0739 + 16.12*(−0.0017)). On
the other hand, an added ESG concern would decrease it by 3.1%. In other words, we find that ESG-related disclosure strongly
reduces the valuation effects of both ESG strengths and ESG concerns. In particular, with ESG concerns, the moderated valuation
effect is less than half what it would be without the disclosure.
5.2. Additional tests: ESG strengths, concerns, and their components
We perform additional tests to examine the differential influences of ESG strengths and ESG concerns on firm value and to
investigate whether the valuation consequences of ESG strengths and concerns and their disclosure hold uniformly for all three
12
In the absence of ESG strength and concerns, and with everything else held constant, each further ESG disclosure rating point is associated with a 1.82% decrease in
firm value. However, for the median firm, with two ESG strengths and three ESG concerns, a further ESG disclosure rating point is associated with a 1.23% decrease in
Tobin's q (−0.0182 + 2 ∗ (−0.0017) + 3 ∗ 0.0031).
components of ESG factors. The major findings of these additional tests are summarized in Table 5. For the sake of brevity, we
report the estimation results only for the coefficients of interest from the second-stage regressions of our 2SLS model and refrain
from reporting results for the first-stage regressions or for the control variables, which are generally very similar to those for our
main model reported in Table 4. In particular, the first-stage regressions are similar, and none of the five models suffers from
under-, weak, or overidentification. The postestimation tests indicate that our instrumental variables meet the relevance condition
and the exclusion restriction when used for the separate analyses of ESG strengths and concerns and for each of the three envi-
ronmental, social, and governance disclosure components.
The estimates of the coefficients for our variables of interest, DISC, STR, CON, and their interactions, STR*DISC and CON*DISC,
are also generally consistent with those for the main model. In all model variants, ESG-related disclosure significantly decreases
firm value. ESG strengths and ESG concerns, when examined independently of each other in models 1 and 2, also behave consis-
tently with the main model; that is, the strengths increase firm value and the concerns decrease it. Estimating the model sepa-
rately for each of the three components of ESG (models 3 to 5), we find again that concerns always decrease firm value, and
disclosure of those concerns always alleviates this reduction. Furthermore, in accord with the main results, for all three models,
the estimated coefficients for environmental, social, and governance strengths are positive, and the coefficients for the interaction
terms STR*DISC are negative. However, the estimated coefficients of STR and STR*DISC are statistically significant only in model 3
for environmental strengths and concerns, and only at the 10% level. In other words, our findings suggest that firms do not stand
to gain (or lose) significantly from investing in either social or governance strengths. At the same time, the results indicate that
investors react negatively to social and governance concerns. In fact, the estimated coefficient in model 5 for governance concerns
Fig. 1. a. Interaction between ESG disclosure and ESG strengths. b. Interaction between ESG disclosure and ESG concerns. Figure panels a and b are conditional
effects plots based on our instrumental variables regressions of Tobin's q on ESG strengths (ESG concerns) and the control variables. We estimate the instrumental
variable model for ESG strengths (ESG concerns) for the subsamples of high (i.e., above-median) and low (i.e., below-median) ESG disclosure, generate conditional
predictions using the parameter estimates of the regression coefficients, and plot the association between Tobin's q and ESG strengths and ESG concerns, respec-
tively. For the predictions, we set the control variables equal to their relevant subsample medians (indicator variables for industry and year are excluded when
generating the predictions).
Table 5
Additional tests—2SLS estimation results for subsamples (only second-stage regression shown).
(1) ESG strengths (2) ESG concerns (3) Environmental (4) Social (5) Governance
DISC −0.0220* −0.0174** −0.0183* −0.0290*** −0.0626**

(−1.77) (−2.08) (−1.67) (−2.71) (−2.55)
(0.076) (0.038) (0.095) (0.007) (0.011)
STR 0.1048* 0.2340* 0.0253 1.6956
(1.80) (1.75) (0.54) (1.28)
(0.072) (0.079) (0.592) (0.202)
STR*DISC −0.0037** −0.0085* −0.0001 −0.0329
(−2.24) (−1.69) (−0.05) (−1.42)
(0.025) (0.091) (0.959) (0.157)
CON −0.0776** −0.5318** −0.1142* −1.2545**
(−2.03) (−2.30) (−1.85) (−2.31)
(0.043) (0.022) (0.065) (0.021)
CON*DISC 0.0030** 0.0218** 0.0082*** 0.0228**
(2.27) (2.02) (2.89) (2.30)
(0.023) (0.043) (0.004) (0.021)
Controls Included Included Included Included Included
Constant Included Included Included Included Included
INDUSTRY Included Included Included Included Included
YEAR Included Included Included Included Included
F-stat 13.49*** 28.45*** 9.07*** 14.92*** 19.68***
Adj. R2 45.33% 62.05% 30.15% 44.46% 51.68%
N 1239 1598 874 1506 1615
Note: *** (**, *) denotes significance at the 1% (5%, 10%) level (two-sided test). t-statistics and p-values are given in parentheses. Variables are defined as in Ap-
pendix A.
Table 5 presents the estimation results for the second-stage regression for the dependent variable, i.e., firm value (TOBINQ) for several subsamples. For the sake of
brevity, the estimation results for the three first-stage regressions for the three endogenous regressors, i.e., ESG disclosure (DISC), the interaction between ESG
strengths and ESG disclosure (STR*DISC), and the interaction between ESG concerns and ESG disclosure (CON*DISC), are not tabulated.
TOBINQi,t = α0 + β1DISCi,t + β2STRi,t + β3STR*DISCi,t + β4CONi,t + β5CON*DISCi,t + Controls, where DISC is instrumented by CSRCOMM, DISP, and
OWNERCONC; STR*DISC is instrumented by STR*CSRCOMM, STR*DISP, and STR*OWNERCONC; and CON*DISC is instrumented by CON*CSRCOMM, CON*DISP,
and CON*OWNERCONC.
Columns 1 and 2 present the estimation results for the ESG strengths and ESG concerns subsamples, respectively.
Columns 3 to 5 show the estimation results for the environmental, social, and governance subsamples, respectively.
is the largest among all model variants (β = − 1.2545), much larger than the estimated coefficient for social concerns (β =
−0.1142) and that for environmental concerns (β = −0.5318).
In what follows, we again more closely examine the economic importance of the cumulative valuation effects of ESG strengths
and concerns on the one hand and ESG disclosure on the other hand. The median firm within our KLD environmental subsample
has a Bloomberg ESG disclosure rating of 13.9535. Thus, with all else constant, adding an environmental strength is associated
with an 11.54% increase in Tobin's q (+0.234 + 13.9535 ∗ (−0.0085)). However, an incremental concern has an even stronger
impact; it is associated with a 22.76% decrease in Tobin's q (−0.5318 + 13.9535 ∗ 0.0218). Again, for the KLD social and gover-
nance subsamples, only concerns and their interactions with their respective disclosures are value relevant. In the case of the KLD
social subsample, adding a further concern is, per se, associated with an 11.4% decrease in Tobin's q. Once the moderating effect of
the related disclosure is taken into account, however, the decrease is only 4.23% (−0.1142 + 8.7719 ∗ 0.0082). For the KLD gov-
ernance subsample, an incremental concern in the absence of any related disclosure is associated with a massive 125.5% decrease
in Tobin's q. However, once the strong mitigating effect of disclosure is factored in, the overall decrease is only 7.38% (−1.2545
+ 51.7857 ∗ 0.0228).
To sum up, while disclosure tends to reduce the negative valuation consequences of all three ESG components, this effect is much
more pronounced when those concerns are centered on governance issues rather than environmental or social concerns—perhaps be-
cause governance-related disclosures tend to be mandated and regulated by the SEC (see, for example, Holder-Webb, Cohen, Nath, &
Wood, 2008), so the markets can assess their veracity with relatively high ease and confidence. Disclosure related to social and environ-
mental concerns, in contrast, is usually voluntary, invariably more opaque, and more difficult to verify.
5.3. Robustness checks
Given the potential problems associated with the instrumental variables approach, especially the issue of selecting instrumen-
tal variables that satisfy the relevance and exogeneity conditions, Larcker and Rusticus (2010) recommend that the 2SLS/IV esti-
mates be compared to those obtained from a simple OLS. Accordingly, we repeat all our analyses using simple OLS estimation. The
results, presented in Appendix B,13 are in line with the 2SLS/IV estimation results: ESG strengths increase firm value and ESG con-
cerns decrease it. Furthermore, ESG disclosure per se decreases firm value. For ESG concerns, higher ESG disclosure increases
13
For brevity, the results for the separate subsamples of ESG strengths and concerns and for the separate subsamples of environmental, social, and governance activ-
ities and related disclosure are not tabulated. The results from OLS estimation are consistent with the results presented in the previous section from 2SLS/IV estimation.
value, but for ESG strengths, higher ESG disclosure decreases it. The OLS estimated coefficients are comparable to those from 2SLS/
IV, and the significance levels are also generally comparable. As a further robustness test, we rerun all analyses using SEM estima-
tion. The results, presented in Appendix C, are again consistent with those from the 2SLS/IV method.
In line with the recommendations of Larcker and Rusticus (2010), we also establish whether the estimates of our 2SLS/IV are
robust with regard to the choice of instrumental variables. To that end, we first use the average level of disclosure for firms in the
same industry-year (where each firm is assigned to one of the 17 industry groups of Fama & French, 1997) while excluding the
current firm (e.g., Beekes, Brown, Zhan, & Zhang, 2016; Lang & Stice-Lawrence, 2015). The rationale behind this instrument is that
a firm's ESG disclosure is influenced by the ESG disclosure of other firms within the same industry and the same year. Studies
have shown that a firm's disclosure policy is influenced by the policies of its industry peers (e.g., Acharya, DeMarzo, & Kremer,
2011; Jorgensen & Kirschenheiter, 2012; Rogers, Schrand, & Zechman, 2014). Furthermore, ESG disclosure varies across industries
(see, e.g., Eccles et al., 2012; Gamerschlag et al., 2011) and over time as a result of laws and regulations (see, e.g., Cho, Michelon,
Patten, & Roberts, 2015b). Accordingly, we expect the industry-year average level of ESG disclosure to be quite likely to meet the
instrument relevance condition. Because each firm chooses its own value-maximizing disclosure policy, the average disclosure
level of the firm's peers is unlikely to directly affect its market value. Therefore, we assume that our instrumental variable satisfies
the exogeneity condition (exclusion restriction).
Next, we use the level of institutional ownership as an instrumental variable. Research documents a positive association be-
tween institutional ownership and the level of disclosure (e.g., Boone & White, 2015; Bushee & Noe, 2000; Jennings &
Marques, 2011). Focusing on ESG, Saleh, Zulkifli, and Muhamad (2010) find that firms with greater institutional ownership
have greater ESG disclosure. Hence, we expect this instrument to be highly correlated with ESG disclosure, thus satisfying the rel-
evance requirement. The evidence regarding the impact of institutional ownership on firm value is mixed (e.g., Bhattacharya &
Graham, 2009; Elyasiani & Jia, 2010; Ruiz-Mallorqui & Santana-Martin, 2011). Therefore, we cannot assert ex ante whether our
second instrument is likely to meet the exogeneity condition. In this instance, we rely on the results of the postestimation
tests to assess the appropriateness of the instrument.
We reestimate all our 2SLS/IV models using our alternative set of instrumental variables (not tabulated). The postestimation
tests indicate that our model does not suffer from under-, weak, or overidentification with this set of instrumental variables.
Most importantly, the results from these regressions are consistent with the estimates reported in previous sections. That is,
once again, we find that ESG strengths increase firm value and ESG concerns decrease it. Furthermore, ESG disclosure per se de-
creases firm value, and in the presence of ESG concerns, higher ESG disclosure increases firm value. In the presence of ESG
strengths, higher ESG disclosure decreases firm value.
As a final test of robustness, we exclude industries and fiscal years one-by-one from our analyses. This does not lead to any
changes in any of our inferences, allowing us to conclude that our results are not driven by specific industries or time periods.
6. Conclusion
Our findings indicate that ESG strengths increase firm value and that ESG concerns decrease it. When isolated, ESG disclosure is also
found to decrease firm value. A more nuanced picture emerges once disclosure is interacted with ESG strengths or weaknesses. In the
presence of ESG strengths, high ESG disclosure weakens the positive valuation effect of the strengths. A possible explanation for this find-
ing is that the markets may interpret stepped-up disclosure as the firm's attempt to justify an overinvestment in ESG activities. Disclosure
also weakens the negative valuation effects of ESG concerns, perhaps either because disclosures help firms legitimate their behavior by
explaining to investors the appropriateness of their operations and their ESG policies or because firms convince investors that they have
made credible commitments to change their operations and thus overcome ESG weaknesses.
When we repeat our analyses separately for ESG strengths and concerns, the results confirm the results for the general model. We
next estimate models for each of the three components that make up the firm's ESG score: the environmental score, the social score,
and the governance score. These results indicate that environmental strengths increase the firm's valuation and that weaknesses decrease
it; in both cases, disclosure wields a moderating influence. A slightly different conclusion obtains for social and governance factors: while
weaknesses in both areas again tend to decrease valuation, neither social nor governance strengths increase it. The valuation discounts
associated with social and governance weaknesses are again mitigated through the related disclosures.
Finally, the examinations at the level of the individual components reveal that investors discriminate strongly among the dif-
ferent dimensions of the ESG scores. Governance concerns lead to much steeper valuation discounts than social concerns or en-
vironmental concerns (in that order). At the same time, the moderating effects of governance-related disclosure are also much
stronger than those related to social or environmental concerns. We explain these effects in terms of differences in opacity. Gov-
ernance-related disclosures are often mandated and regulated by the SEC, and investors can assess their veracity with relatively
high ease and confidence. Disclosures related to social and environmental concerns, on the other hand, are mostly voluntary and
are therefore more opaque and more difficult to verify.
Acknowledgements
The authors are grateful to the journal's guest editor and an anonymous referee for their invaluable suggestions and comments
on earlier drafts of this paper. The first author gratefully acknowledges the support received from the Development Bank of Japan
through its Shimomura Fellowship. However, this research did not receive any specific grant from funding agencies in the public,
commercial, or not-for-profit sectors.
Appendix A. Variable definitions and data sources
Variable Description Source
TOBINQ Tobin's q [(book value of assets − book value of equity − deferred taxes + market value of equity) / book value of assets] Datastream
(measured as in Servaes & Tamayo, 2013)
DISC ESG disclosure score Bloomberg
CSRCOMM Existence of corporate social responsibility (CSR) committee (dichotomous variable; CSRCOMM = 1 if company has CSR Datastream
committee, CSRCOMM = 0 otherwise)
DISP Standard deviation of analyst earnings forecast (6-month earnings forecast) I/B/E/S
OWNERCONC Ownership of single largest owner (in %) Datastream
STR ESG strengths KLD
CON ESG concerns KLD
ROA Return on assets Datastream
ROAGROWTH Growth of return on assets (in %) Datastream
LNSALES Natural logarithm of sales Datastream
ASSETSSALES Asset intensity (assets / sales) Datastream
LEV Leverage (total debt to market value of equity) Datastream
ADVERT Advertising intensity (advertising expenses / sales) Datastream
ADVERTMISSING Advertising intensity missing (dichotomous variable; ADVERTMISSING = 1 if information on advertising intensity is Datastream
missing, ADVERTMISSING = 0 otherwise)
R&D Research and development (R&D) intensity (research and development expenses / sales) Datastream
R&DMISSING Research and development (R&D) intensity missing (dichotomous variable; R&DMISSING = 1 if information on R&D Datastream
intensity is missing, R&DMISSING = 0 otherwise)
NETGROSSPPE Net to gross property, plant, and equipment Datastream
Appendix B. OLS regression results
TOBINQ
DISC −0.0200***
(−3.54)
(0.000)
STR 0.0379*
(1.71)
(0.089)
STR*DISC −0.0019***
(−2.95)
(0.003)
CON −0.0434*
(−1.94)
(0.053)
CON*DISC 0.0017**
(2.33)
(0.020)
ROA 4.7548***
(6.22)
(0.000)
ROAGROWTH −0.0284**
(−2.49)
(0.013)
LNSALES −0.1192***
(−2.88)
(0.004)
ASSETSSALES −0.0676***
(−4.08)
(0.000)
LEV −0.1925***
(−4.37)
(0.000)
ADVERT 0.4521
(0.82)
(0.415)
ADVERTMISSING −0.1543**
(−2.02)
(continued on next page)

(continued)
TOBINQ
(0.044)
R&D 2.5680***
(3.11)
(0.002)
R&DMISSING −0.1275
(−1.47)
(0.143)
NETGROSSPPE 0.1163
(0.55)
(0.580)
CONST 3.2284***
(9.82)
(0.000)
INDUSTRY Included
YEAR Included
F-stat 16.70***
Adj. R2 41.31%
N 1640
Note: *** (**, *) denotes significance at the 1% (5%, 10%) level (two-sided test). t-statistics and p-
values are given in parentheses. Variables are defined as in Appendix A.
The table presents results from an OLS estimation of the following regression equation: TOBINQi,t =α0 +
β1DISCi,t + β2STRi,t + β3STR*DISCi,t + β4CONi,t + β5CON*DISCi,t + Controls.
Appendix C. SEM results
DISC −0.0193**
(−3.62)
(0.000)
CSRCOMM 3.6788***
(4.52)
(0.000)
DISP 1.2919
(0.69)
(0.489)
OWNERCONC −0.0850***
(−3.12)
(0.002)
STR 1.6514*** 31.2016*** 0.0373*
(8.08) (10.93) (1.74)
(0.000) (0.000) (0.082)
STR*DISC −0.0019***
(−2.96)
(0.003)
STR*CSRCOMM 6.7030***
(3.85)
(0.000)
STR*DISP 4.1780
(1.00)
(0.317)
STR*OWNERCONC −0.1814
(−1.64)
(0.101)
CON 0.0228 23.3024*** −0.0433**
(0.11) (12.39) (−2.03)
(0.916) (0.000) (0.043)
CON*DISC 0.0017**
(2.21)
(0.027)
CON*CSRCOMM 6.2544***
(4.24)
(0.000)
CON*DISP 3.5278
(0.88)
(continued)
(0.379)
CON*OWNERCONC −0.1283
(−1.57)
(0.117)
ROA 4.4486 57.0305* 37.1480 5.0127***
(0.94) (1.96) (1.38) (6.30)
(0.349) (0.050) (0.166) (0.000)
ROAGROWTH −0.0587 −0.8847 −0.8363 −0.0327***
(−0.52) (−1.43) (−1.43) (−2.71)
(0.606) (0.152) (0.153) (0.007)
LNSALES 1.6425*** −0.0293 13.0150*** −0.1225***
(3.10) (−0.01) (5.83) (−3.19)
(0.002) (0.991) (0.000) (0.001)
ASSETSSALES −0.1449 −0.4211 1.6941* −0.0715***
(−1.00) (−0.45) (1.92) (−4.56)
(0.318) (0.652) (0.055) (0.000)
LEV −0.2955 −1.9197 −4.1877 −0.1912***
(−0.57) (−0.70) (−1.17) (−4.37)
(0.568) (0.487) (0.240) (0.009)
ADVERT −11.4772 −60.8823 −44.4276 0.4679
(−1.55) (−1.35) (−1.37) (0.85)
(0.120) (0.178) (0.171) (0.396)
ADVERTMISSING −1.6138 −10.5294 −11.0483* −0.1559**
(−1.39) (−1.52) (−1.76) (−2.06)
(0.164) (0.129) (0.078) (0.039)
R&D 9.9365 7.1685 80.0841** 2.5320***
(0.75) (0.15) (2.19) (3.13)
(0.453) (0.882) (0.029) (0.002)
R&DMISSING −0.7781 2.9738 −2.8015 −0.1250
(−0.51) (0.33) (−0.26) (−1.43)
(0.614) (0.741) (0.792) (0.152)
NETGROSSPPE 4.0028 16.2611 4.6781 0.1057
(1.40) (1.13) (0.32) (0.51)
(0.160) (0.260) (0.752) (0.612)
CONST 1.5213 −21.8518 −14.8339*** 3.2690***
(0.29) (−0.87) (−4.83) (9.61)
(0.774) (0.382) (0.000) (0.000)
INDUSTRY Included Included Included Included
YEAR Included Included Included Included
Wald test for equations χ2 392.15*** 1100.60*** 568.76*** 436.31***
Adj. R2 43.83% 81.84% 72.04% 44.78%
Root mean squared error of approximation (RMSEA) 0.140
Comparative fit index (CFI) 0.860
Standardized root mean squared residual (SRMR) 0.021
N 1640 1640 1640 1640
Note: *** (**, *) denotes significance at the 1% (5%, 10%) level (two-sided test). z-statistics and p-values are given in parentheses. Variables are defined as in
Appendix A.
The table presents results from SEM estimation. Columns 1 to 3 present the estimation results for the three regressions for the
three endogenous regressors, i.e., ESG disclosure (DISC), the interaction between ESG strengths and ESG disclosure (STR*DISC),
and the interaction between ESG concerns and ESG disclosure (CON*DISC). The existence of a CSR committee (CSRCOMM), ana-
lyst forecast dispersion (DISP), and ownership concentration (OWNERCONC) are used to explain the endogenous regressor ESG
disclosure (DISC); the interactions between these three variables and the ESG strengths (ESG concerns) are used to explain the
endogenous regressor STR*DISC (CON*DISC). Column 4 presents the estimation results for the regression for the dependent var-
iable, i.e., firm value (TOBINQ): TOBINQi,t = α0 + β1DISCi,t + β2STRi,t + β3STR*DISCi,t + β4CONi,t + β5CON*DISCi,t + Controls,
where DISC is explained by CSRCOMM, DISP, and OWNERCONC; STR*DISC is explained by STR*CSRCOMM, STR*DISP, and
STR*OWNERCONC; and CON*DISC is explained by CON*CSRCOMM, CON*DISP, and CON*OWNERCONC. In contrast to 2SLS/IV es-
timation, not all instruments are included as regressors in all regressions for the three endogenous regressors because SEM esti-
mation allows the designation of explanatory variables to specific endogenous variables.
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Fatemi Et Al (2018) ESG Performance and Firm Value - The Moderating Role of Disclosure

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Global Finance Journal 38 (2018) 45–64

Contents lists available at ScienceDirect

Global Finance Journal

ESG performance and ﬁrm value: The moderating role of

2. Related literature and predictions

2.1. Environmental, social, and governance factors (ESG)

2.2. ESG disclosure

3. The theoretical model: the moderating role of ESG disclosure

DISCi;t ¼ α0 þ β1 CSRCOMMi;t þ β2 DISPi;t þ β3 OWNERCONCi;t þ β4 STRi;t þ β5 CONi;t

4. Data and sample

Panel A: composition by year

Panel B: composition by industry

Agriculture & forestry 25

Mean Standard deviation Percentile 25 Median Percentile 75

TOBINQ 1.8819 1.0010 1.2183 1.5639 2.1538

A. Fatemi et al. / Global Finance Journal 38 (2018) 45–64

First Stage First Stage First Stage Second Stage

CSRCOMM 5.5812*** −27.2802*** −26.7078***

(continued on next page)

First Stage First Stage First Stage Second Stage

(−0.20) (0.11) (−0.06) (−1.31)

5. Empirical results and discussion

5.1. ESG performance, ESG disclosure, and ﬁrm value

5.2. Additional tests: ESG strengths, concerns, and their components

DISC −0.0220* −0.0174** −0.0183* −0.0290*** −0.0626**

5.3. Robustness checks

Appendix A. Variable deﬁnitions and data sources

Variable Description Source

Appendix B. OLS regression results

(continued on next page)

Appendix C. SEM results

DISC STR*DISC CON*DISC TOBINQ

DISC STR*DISC CON*DISC TOBINQ

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CSRCOMM 5.5812* −27.2802* −26.7078***

DISC −0.0220* −0.0174** −0.0183* −0.0290* −0.0626

DISC STRDISC CONDISC TOBINQ

DISC STRDISC CONDISC TOBINQ