Higher highs and lower lows: investor valuation of ESG and financial performance

This paper examines the association between environmental, social, and governance (ESG) performance and firm value. Using a sample of 1,072 Korean listed firms from 2011 through 2019, we show that ESG performance is positively associated with firm value. This positive association almost disappears, however, for firms that fall into the below-median ROA group. Moreover, the value implications of ESG performance decrease monotonically as a firm’s financial performance worsens from the highest to the lowest ROA quartile, resulting in a negative value effect of ESG performance for firms that fall into the lowest ROA quartile. Lastly, this association is more pronounced among firms that suffer from severe information asymmetry. The results suggest overall that investor valuations of ESG performance depend on financial performance.