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Short-run and long-run effects of ESG policies on value creation and the cost of equity of firms

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  • Rojo-Suárez, Javier
  • Alonso-Conde, Ana B.

Abstract

Despite the general trend to include ESG scores in the evaluation of firm performance, the effect of ESG policies on the market value of companies is currently a subject of debate. In this paper we propose a dynamic version of Ohlson’s model under time-varying discount rates consistent with the Campbell–Shiller present value identity. This enables differentiation between short term and long term implications of ESG performance on value creation, as well as income and substitution effects. Our results suggest that, although ESG policies imply almost no effects in the short-run, at longer horizons, better ESG performance results in lower value creation, mainly due to substitution effects channeled to market value via higher long-term discount rates. Our results are consistent with ESG strategies implying transitory effects on the cost of equity and the market value, which may result from time-varying investor preferences, long-term reputational penalties, or market misvaluation.

Suggested Citation

  • Rojo-Suárez, Javier & Alonso-Conde, Ana B., 2023. "Short-run and long-run effects of ESG policies on value creation and the cost of equity of firms," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 599-616.
    • Handle: RePEc:eee:ecanpo:v:77:y:2023:i:c:p:599-616
    DOI: 10.1016/j.eap.2022.12.017
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    Cited by:

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    3. Nie, Jun & Jian, Xin & Xu, Juanjuan & Xu, Nuo & Jiang, Tangyang & Yu, Yang, 2024. "The effect of corporate social responsibility practices on digital transformation in China: A resource-based view," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 1-15.
    4. Rojo-Suárez, Javier & Alonso-Conde, Ana B. & Gonzalez-Ruiz, Juan David, 2024. "Does sustainability improve financial performance? An analysis of Latin American oil and gas firms," Resources Policy, Elsevier, vol. 88(C).
    5. Chen, Yongtai & Ren, Yi-Shuai & Narayan, Seema & Huynh, Ngoc Quang Anh, 2024. "Does climate risk impact firms' ESG performance? Evidence from China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 683-695.
    6. Yu Zhang & Xiaotong Wang & Wei Guo & Xinlei Guo & Qisheng Wang & Xin Tan, 2024. "Does ESG Performance Affect the Enterprise Value of China’s Heavily Polluting Listed Companies?," Sustainability, MDPI, vol. 16(7), pages 1-21, March.

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    More about this item

    Keywords

    ESG; CSR; Corporate governance; Value creation; Cost of equity; Dynamic Ohlson model;
    All these keywords.

    JEL classification:

    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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