Assessing the static and dynamic effects of ESG performance on corporate financial and market outcomes: Global evidence from instrumental variable and GMM analyses

This study investigates whether Environmental, Social, and Governance (ESG) performance exhibits statistically and economically meaningful effects on corporate outcomes once endogeneity and temporal dynamics are explicitly modelled. Using a global panel of approximately 2156 publicly listed firms (2016–2023) across North America, South America, Europe, Asia, and Oceania (17,248 firm-year observations), the analysis combines two complementary econometric strategies. First, fixed-effects instrumental-variables (IV) regressions address endogeneity in ESG performance by instrumenting ESG pillar scores with country-level regulatory quality and rule of law indicators. Second, dynamic system Generalized Method of Moments (GMM) models trace the time profile of ESG effects over one to five-year horizons. The static IV estimates indicate that environmental and social performance are positively associated with both accounting profitability (ROA) and market valuation (Tobin's Q), whereas governance performance is not statistically significant in contemporaneous specifications. The dynamic evidence reveals pronounced temporal heterogeneity: ESG effects on ROA are strongest in the short-to-medium term (up to three years) and dissipate thereafter, while the positive valuation effects observed at short horizons attenuate and become negative from the third year onward, particularly for governance-related performance. Overall, the findings imply that ESG is neither a uniform nor time-invariant determinant of firm outcomes; rather, value implications are pillar-specific and horizon-dependent, underscoring the importance of targeted environmental and social strategies and dynamic evaluation frameworks for research and practice.