The impact of social, environmental and corporate governance disclosures on firm value

TLDR

This study investigates how disclosure of environmental, social, and governance (ESG) practices affects firm value in Egypt, focusing on the combined economic effects in an emerging market. Using univariate and multivariate regressions on data from 2007 to 2016, the authors examine the impact of being listed and ranked in the Egyptian Corporate Responsibility Index on firm value. Firms listed in the ESG index and those with higher rankings exhibit significantly higher firm value as measured by Tobin’s q, demonstrating the economic benefits of ESG disclosures and encouraging regulators, investors, and firms to strengthen ESG practices.

Abstract

Purpose The purpose of this paper is to examine the impact of environmental, social, and governance (ESG) practices disclosure and firm value in the Egyptian context. This is done through investigating the influence of being listed and ranked in the Egyptian Corporate Responsibility Index on firm value during the period starting from 2007 to 2016. Design/methodology/approach Using univariate and multivariate analyses, the findings support the economic benefits of ESG disclosures. Findings The authors find that firms listed in the ESG index have higher firm value, and that there is a positive association between firms’ higher rankings in the index and firm value, as measured by Tobin’s q . Research limitations/implications The findings provide feedback to regulators and standard-setters in the developing countries, and more specifically the Egyptian regulators, on the benefits associated with the introduction of the sustainability index (Standard & Poor’s (S&P)/EGX ESG index). This, in turn, clarifies how the government’s efforts to promote ESG provide benefits to publicly traded firms. Practical implications By linking ESG to firm value, the ESG index will enable investors to take a leading role in inducing firms to enhance transparency and disclosure, and hence, improving their reporting standards. This, in turn, will ultimately result in improving sustainability and governance practices in Egypt. Social implications The reported positive market reactions to social and governance practices disclosures can motivate firms to improve their social and governance performance. Originality/value The study contributes to the literature by addressing the combined economic effects of social and governance disclosures on firm value, and by investigating the economic effects of such disclosures on firm value in an emerging market.