ESG performance and investment efficiency: The impact of information asymmetry

Seda Bilyay-Erdogan, Gamze Ozturk Danisman and Ender Demir

Journal of International Financial Markets, Institutions and Money, 2024, vol. 91, issue C

Abstract: This paper investigates the relationship between firms' engagement in environmental, social, and governance (ESG) activities and corporate investment efficiency, using 1,094 firms from 21 countries in Europe, covering the years 2002–2019. We conduct our estimations using fixed effects panel data techniques and address potential endogeneity with instrumental variables (IV) estimations. We provide evidence that overall ESG engagement is positively and significantly associated with investment efficiency. Analyzing overinvestment and underinvestment scenarios shows that ESG engagement decreases only overinvestment problems. Within the underinvestment scenario, we observe that ESG engagement is beneficial only for firms with higher information asymmetries. Thus, information asymmetry matters in the underinvestment case. We next show that four firm-level channels—information asymmetry, financial constraints, cash flows, and risk—link ESG performance to investment inefficiency. Additional analysis shows that firms with extreme ESG scores (i.e., very low and very high) do not experience significant reductions in investment inefficiency. Altogether, our findings draw attention to the critical role of ESG performance and information asymmetry in determining corporate investment efficiency.

Keywords: ESG Performance; Investment Efficiency; Overinvestment; Underinvestment; Information Asymmetry; Europe (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:91:y:2024:i:c:s1042443123001877

DOI: 10.1016/j.intfin.2023.101919

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