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SDG adoption and firm risk: The impact of ESG performance, investor confidence, and agency cost

Author

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  • Sharma, Rajat
  • Chawla, Sonia
  • Dagar, Vishal
  • Kagzi, Muneza
  • Rao, Amar

Abstract

This study investigates the nexus between firm-level Sustainable Development Goals (SDG) adoption and firm risk using a unique dataset of National Stock Exchange (NSE) 500 companies from 2019 to 2024. It constructs a novel SDG adoption index to assess this relationship and reveals a noteworthy reduction in firm risk associated with SDG adoption. The results remain robust after a battery of robustness checks, including endogeneity concerns using 2SLS IV and system GMM and sample selection bias through Heckman's two-stage methods. Furthermore, the mechanism test indicates that SDG adoption reduces firm risk by enhancing investor confidence, improving ESG performance, and reducing agency costs. In addition, heterogeneity analyses demonstrate that the impact is more accentuated for enterprises with higher information asymmetry, higher board gender diversity, and non-state ownership. The results carry significant implications for investors, corporations, and policymakers seeking to mitigate risk and foster sustainable practices, particularly within the context of the COVID-19 pandemic and emerging markets.

Suggested Citation

  • Sharma, Rajat & Chawla, Sonia & Dagar, Vishal & Kagzi, Muneza & Rao, Amar, 2025. "SDG adoption and firm risk: The impact of ESG performance, investor confidence, and agency cost," International Review of Economics & Finance, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:reveco:v:101:y:2025:i:c:s1059056025003685
    DOI: 10.1016/j.iref.2025.104205
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    Cited by:

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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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