Do firms’ ESG activities create long-term value? Evidence from the perspectives of market, firm and institutional investors

Abstract

This thesis aims to offer unique insights into and robust evidence for the long-term value of ESG (Environmental, Social, and Governance). The thesis is grounded in two streams of literature: (1) mixed empirical results on the relationship between ESG activities and firm value and (2) specific benefits of firms’ ESG (e.g., low risk, high competitiveness, product differentiation). Accordingly, this thesis comprises three empirical papers which systematically identify the long-term value of ESG from different perspectives: market recognition, ESG information informativeness, and institutional investors’ contribution. The first paper shows that the market considers firm-level ESG as an investment generating long-term value, through the adoption of the accounting-based valuation model from a market perspective. The second paper reveals that ESG is informative from the firm’s perspective, especially in respect of future earnings. Together, both papers provide internal and external validation of the long-term value relevance of firms’ ESG activities. Alongside the first two papers, the third paper reinforces the long-term value creation of firms’ ESG activities by finding that institutional investors can effectively enhance firms’ ESG, thus achieving long-term profits.

By adopting a quantitative methodology, this thesis uses time series data and a fixed effect model to empirically examine and draw inferences on ESG activities' long- term value. My thesis uses firms listed on FTSE 350 and S&P 500 indices during the same time-period from 2009 (after the financial crisis) to 2019 (before COVID-19) as samples, which ensures the consistency and comparability across all analyses. Accordingly, this thesis not only provides systematic and conclusive evidence on the long-term value of ESG from multiple perspectives but also offers a comprehensive and integrated understanding of the mechanisms for how ESG works in relation to the market, firm, and institutional investors. This bridges the gaps in the previously fragmented understanding between ESG and firm value in earlier literature. Moreover, by confirming the longterm value creation of firms’ ESG activities, this thesis highlights salient practical implications for companies, investors, policymakers, and regulators to strengthen their respective ESG engagement strategies.

Keywords: firms’ ESG activities, near-term earnings, long-term value, stock price, information informativeness, dynamic capability theory, market perspective, firm perspective, institutional investors’ perspective

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Identifiers

ORCID for Yixiao Liu: orcid.org/0000-0002-2837-5627

ORCID for Krish Vithana: orcid.org/0000-0001-9976-7399

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