IDEAS home Printed from https://ideas.repec.org/a/eme/sampjp/sampj-09-2022-0464.html
   My bibliography  Save this article

Can sustainability performance mitigate the negative effect of policy uncertainty on the firm valuation?

Author

Listed:
  • Asil Azimli
  • Kemal Cek

Abstract

Purpose - The purpose of this paper is to test if building reputation capital through environmental, social and governance (ESG) investing can mitigate the negative effect of economic policy uncertainty (EPU) on firms’ valuation. Design/methodology/approach - This study uses an unbalanced panel of 591 financial firms between 2005 and 2021 from Canada, France, Germany, Italy, Japan, the United Kingdom (UK) and the USA. Ordinary least square method is used in the empirical tests. To alleviate a potential endogeneity problem, robustness tests are performed using the two-stage least square approach with instrumental variables. Findings - The results of this paper show that sustainable reporting can offset the negative effect of EPU on the valuation of financial firms. Consistent with the stakeholder-based reputation-building hypothesis, sustainability performance may have an insurance-like impact on firms’ valuation during periods of high uncertainty. Practical implications - According to the findings, during high policy uncertainty periods, investors accept to pay a premium for the stocks of the firms which built social capital through environmental and social investments. Accordingly, it is suggested that regulatory bodies and governments motivate firms to increase their stakeholder orientation to attain higher reputation capital. Social implications - Managers can mitigate the negative impact of policy uncertainty on the value of their firms via building social capital, which will increase financial market stability in return, and portfolio investors may use such firms for portfolio optimization decisions. Originality/value - To the best of the authors’ knowledge, this paper is one of the first to examine the mitigating role of ESG investing on EPU and firm valuation relationships for financial firms. Thus, this study provides new insights related to the impact of ESG performance on valuation during uncertain times.

Suggested Citation

  • Asil Azimli & Kemal Cek, 2023. "Can sustainability performance mitigate the negative effect of policy uncertainty on the firm valuation?," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 15(3), pages 752-775, June.
    • Handle: RePEc:eme:sampjp:sampj-09-2022-0464
    DOI: 10.1108/SAMPJ-09-2022-0464
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/SAMPJ-09-2022-0464/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/SAMPJ-09-2022-0464/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/SAMPJ-09-2022-0464?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Corporate social responsibility; Sustainable reporting; Policy uncertainty; Market valuation; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:sampjp:sampj-09-2022-0464. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.