Help or Hurt? The Impact of ESG on Firm Performance in S&P 500 Non-Financial Firms

Abstract

The paper aims to investigate the impact of ESG practice on firms’ financial performance in the context of U.S. market from 2018 to 2020. The paper examines a sample of 57 U.S. non-financial firms belonging to the S&P 500. The Two-Stage Least Squares (2SLS) estimation is employed with an instrumental variable - the political views of the states where the studied firms are located. The paper shows that having a better practice of ESG could enhance firms’ financial performance measured by ROA, ROE, and TobinQ. These findings are consistent with the stakeholder-focused theory instead of shareholder-focus perspective. In addition, the magnitude of the influence of the ESG practice on TobinQ is significantly higher than that of the ESG-ROA and ESG-ROE relations. It reveals that the ESG benefits could make the firms appear more attractive to investors, creating higher market values of the firms’ assets and then higher TobinQ ratio. Not as the TobinQ enhancement, the significant improvement in ROA and ROE would be realized in the long run rather than short term. The low managerial ownership in the U.S. market may increase the chance of ESG overinvestment by the firms’ managers, hence reducing firm value. However, under the pressure of the investors’ strong demand for socially responsible investing, the U.S. firms tend to become involved in ESG activities, obtaining a strong stakeholder commitment and thus creating additional firm value in the long run.

Keywords

• esg
• firm performance
• stakeholder value maximization theory
• u.s. market