Social and ethical practices and firm value: the moderating effect of green innovation: evidence from international ESG data

This study aims to examine the potential effect of integrating social and ethical practices into strategy on the market valuation of environmental, social and governance (ESG) businesses using the moderating effect of green innovation.

The sample used consisted of 523 international firms listed on the ESG index and headquartered in North America and Western Europe, forming an unbalanced panel of 7,845 observations spanning the period 2005–2019. The authors run a fixed-effects panel regression model using the Thomson Reuters ASSET4 to test the relationship between societal and ethical practices and the stock market value creation. Similarly, as an extension of the research, this paper exploits two robustness analyzes. The authors tested the dynamic dimension of the data set through the generalized moment method and the effect of the legal system.

Evidence reveals a significant positive relationship between societal and ethical practices and businesses’ market valuation. The empirical results indicate that societal and ethical strengths increase firm value with the moderating effect of green innovation and weaknesses reduce it. The results found with the dynamic dimension of the data set indicate the existence of continuity between firm values over time.

Given the long study period, many firms with missing data were eliminated. To avoid the small sample size, countries with few observations were included, which led to an uneven distribution between observations per country.

Findings from this paper can help ESG firms to consider their future growth opportunities in a context where the approach of business ethics occupies a central position in business valuation.

This study is the only study that provides ESG companies with seven different nationalities with evidence for the effect of social and ethical practices regarding market valuation. This paper is also relevant as it addresses the relationship between social effectiveness and financial efficiency, as well as the dynamic effect of this relationship.