Environmental, social and governance performance (ESG) and firm investment efficiency in emerging markets: the interaction effect of board cultural diversity

Abstract

Purpose

This paper aims to explore whether environmental, social and governance (ESG) performance is positively associated with firm investment efficiency (IE) in emerging economies. It also examines whether board cultural diversity can moderate the ESG–IE relationship.

Design/methodology/approach

This paper uses a cross-country sample of listed firms located in seven emerging countries over the 2011–2019 period. The authors use a fixed effect panel regression to empirically test the hypotheses. The authors also use a lagged model and a Heckman’s (1979) two-stage procedure to mitigate potential endogeneity issues. In addition, a two-stage least squares regression analysis was done as an additional robustness check.

Findings

This study finds that firms with stronger ESG performance have a higher investment efficiency. Interestingly, this study finds that board cultural diversity negatively moderates the impact of ESG performance on IE for firms operating in settings prone to overinvestment. This result suggests that ESG performance plays a less important role in mitigating managers' tendencies to overinvest when corporate boards have more foreign directors. However, the authors do not find such evidence in firms prone to underinvestment. These findings hold after using an alternative measure of IE and controlling for endogeneity concerns.

Originality/value

This paper adds to the existing body of knowledge in three dimensions. First, to the best of the authors’ knowledge, this is the first cross-country study that investigates the linkage between ESG performance and corporate IE in the context of emerging countries. Second, the authors have enriched the prior literature by examining the moderating effect of board cultural diversity on the positive association between ESG performance and corporate IE. Finally, this study has important implications for policymakers and capital suppliers in emerging countries, which strive to facilitate the efficient allocation of scarce resources.

Citation

Al-Hiyari, A., Ismail, A.I., Kolsi, M.C. and Kehinde, O.H. (2023), "Environmental, social and governance performance (ESG) and firm investment efficiency in emerging markets: the interaction effect of board cultural diversity", Corporate Governance, Vol. 23 No. 3, pp. 650-673. https://doi.org/10.1108/CG-03-2022-0133