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ESG performance and investment efficiency: The impact of information asymmetry

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  • Bilyay-Erdogan, Seda
  • Danisman, Gamze Ozturk
  • Demir, Ender

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.

Suggested Citation

  • Bilyay-Erdogan, Seda & Danisman, Gamze Ozturk & Demir, Ender, 2024. "ESG performance and investment efficiency: The impact of information asymmetry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:intfin:v:91:y:2024:i:c:s1042443123001877
    DOI: 10.1016/j.intfin.2023.101919
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    5. Serhiy Zabolotnyy, 2024. "Investigating the Nexus Between Energy Transition Reporting Practices and Corporate Efficiency in the European Agri-Food Sector," Energies, MDPI, vol. 17(21), pages 1-19, November.
    6. Marek Walacik & Aneta Chmielewska, 2024. "Energy Performance in Residential Buildings as a Property Market Efficiency Driver," Energies, MDPI, vol. 17(10), pages 1-18, May.
    7. Zhou, Mengling & Huang, Zizhen & Jiang, Kangqi, 2024. "Environmental, social, and governance performance and corporate debt maturity in China," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    8. Chen, Mengtao, 2024. "ESG performance and firm misconduct: Evidence from R&D manipulation," Economics Letters, Elsevier, vol. 237(C).
    9. Hong Xu & Yukun Li & Weifen Lin & Hui Wang, 2024. "ESG and customer stability: a perspective based on external and internal supervision and reputation mechanisms," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-14, December.

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    More about this item

    Keywords

    ESG Performance; Investment Efficiency; Overinvestment; Underinvestment; Information Asymmetry; Europe;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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