Corporate ESG investments and Firm's value under the real-option framework: Evidence from two world-leading economies

Under the UN sustainable development goals (SDGs), the United States (US) and China have ambitious environmental, social, and governance (ESG) investment plans. However, dichotomy is found in the literature about how rising ESG practices affect firm value (FV). This study examines the linear and nonlinear effect of ESG practices on FV and how growth-option value (GV) moderates this connection in the real-option framework. We use data on 5220 listed US and Chinese firms from 2018 to 2022 with a generalized method of moments model. The empirical results confirm that ESG practices nonlinearly affect FV, implying that ESG practices turn FV trajectory from positive to negative, and the degree of this effect varies across the sample but is more pronounced at Chinese firms than US firms. We also find that GV negatively moderates the nexus between ESG practices and FV across the sample. Our endogeneity-adjusted results pass robustness tests and have important policy implications.