Sustainable behaviors and firm performance: The role of financial constraints’ alleviation

Dongyang Zhang and Brian Lucey

Economic Analysis and Policy, 2022, vol. 74, issue C, 220-233

Abstract: Financial mechanisms play a vital role in maintaining firm performance alongside sustainable growth practices, which include factors such as low-carbon emissions, green energy, and climate change. External investors increasingly incorporate environmental, social, and governance (ESG) considerations into their investment decisions. However, there is limited data on the potential mechanisms underlying ESG and how ESG performance relates to firm performance. This paper, therefore, focuses on the relationship between firms’ ESG performance and explores whether firm performance is moderated by ESG-related financial mechanisms. Our empirical analysis is based on data from 215,110 firm-year observations from global, publicly-traded firms during the period 2016–2020. Using ROA and ROS as measures, we found that ESG performance has a significant and positive effect on firm performance. Second, we discovered that ESG performance improves firm performance by alleviating financial constraints. Third, our results show that ESG performance improves external financing, including long-term and short-term debt. Finally, we demonstrate that strong ESG performance sends a high-quality signal to the credit market, which helps firms gain more trade credit, allowing them to improve their performance and the financial environment.

Keywords: Low-carbon emissions; ESG performance score; Financial constraints; Financial intermediations (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:74:y:2022:i:c:p:220-233

DOI: 10.1016/j.eap.2022.02.003

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