Does financial distress shape the effect of ESG disclosure on firm value?

PurposeThis study aims to examine the effect of environmental, social and governance (ESG) disclosure on firm value (FV), emphasizing the moderating role of financial distress (FD) in Southeast Asian countries during 2010–2023.Design/methodology/approachThe study uses stakeholder theory, signaling theory and institutional theory to analyze a panel data set of 2,109 firm-year observations from 397 publicly listed companies in Southeast Asia, covering the period from 2010 to 2023. The research collects data from the LSEG Workspace database. To address heteroscedasticity, autocorrelation and endogeneity concerns, the study uses a Feasible Generalized Least Squares (FGLS) and Two-Stage Least Squares (2SLS) estimations to test the hypotheses.FindingsThe findings show a negative direct relationship between ESG disclosure and FV, indicating that ESG activities reduce market valuation in developing countries. However, FD amplifies the positive relationship between ESG disclosure and FV, suggesting that firms under higher FD tend to benefit more from ESG disclosure in terms of market valuation. This study fills the void in the literature by examining the conditional role of FD in shaping the ESG–FV nexus in financially constrained context.Originality/valueThis study adds to the literature by illustrating that ESG disclosure does not universally increase FV. Focusing on emerging markets, the study shows that the valuation effects of ESG disclosure are contingent on firms’ FD. By identifying FD as a key boundary condition, the study offers a contextual refinement of stakeholder theory, signaling theory and institutional theory.