Do agency costs and business risk affect the corporate sustainability–financial performance relationship?

Purpose The aim of this research is to examine the effect of corporate sustainability performance on financial performance and the role of agency costs and business risk in determining this effect. Design/methodology/approach This study uses the data of 83 non-financial Turkish firms listed on Istanbul Stock Exchange during the period 2014–2021. Two-step system GMM models are applied to examine the study’s hypotheses. Findings The results indicate a positive effect of corporate sustainability performance on financial performance, and that this effect is significant only for firms that are more likely to suffer agency costs of equity, firms with R&D expenditures and firms with lower business risk. Practical implications The results of this study confirm the importance of regulations introduced by regulators to support the sustainability initiatives for firms that have less ability to access funds required for their investments. In addition, the findings provide important insight into the role of the persistence of corporate sustainability performance in enhancing financial performance through mitigating managers' opportunistic behavior. Originality/value To the author’s knowledge, this research is one of few that examine the effect of agency costs and business risk on the corporate sustainability–financial performance relationship in emerging markets.