Relationship between firm value, environment, social, and governance – Strengths and controversies

Previous studies only examined one or two two-way relationships among firm value (FV), environmental, social, and governance strengths (ESG), and ESG controversies (ESG contro). We analyze all three: 1) ESG and FV, 2) ESG contro and FV, and 3) ESG and ESG contro. Using 688 observations from 2008 to 2018 of Indian firms, we determine the optimal lag order, cross-sectional dependence (CD), and stationarity for a panel vector autoregressive (panel VAR) model with system generalized method of moments (GMM). We confirm results with Instrumental Variables - Two-Stage Least Squares (IV-2SLS). First, we examine a bi-directional relationship between ESG and FV; however, we find a unidirectional association that supports good management. Second, we confirm the bidirectionality of ESG contro and FV, suggesting a virtuous circle. A decrease in prior ESG contro enhances FV; then, FV surge lessens ESG contro. Our results also reflect that the firms either augment ESG or diminish ESG contro to enhance their FV eventually. Finally, we confirm the bidirectionality of ESG contro–ESG. We confirm that ESG is not invested until earlier ESG contro has increased, supporting the moral cleansing. Regarding past ESG influencing ESG contro, we highlight the unsolved licensing-consistency puzzle in the literature. Initially, our paper also finds contradictory results. Our panel VAR estimates support moral consistency, while IV-2SLS supports moral licensing. Therefore, we investigate the critical conditions under which firms exhibit moral consistency or moral licensing. We find that firms that do not receive CR awards exhibit moral consistency, while those that do receive CR awards exhibit moral licensing. Thus, it is the first study to examine all three kinds of bidirectional links between ESG, ESG contro, and FV, as well as the role of CR awards in resolving the moral licensing-consistency puzzle.