How Does ESG Performance Affect Firm Values and Overinvestments

Examining the relationship between environmental, social, and governance (ESG) performance and firm value has attracted significant attention, as ESG investing has grown rapidly over the last decade. In this study, we examine this issue by investigating the structural change in the effects of ESG scores and firm value, as proxied by Tobin's Q. The results indicate that ESG scores have a more positive impact on Tobin's Q only after 2011, and social and controversial pillars are the most significant in explaining firm valuation. Concerning firm investment, our results also suggest that firms with better ESG have more investment opportunities through higher Tobin's Q. Given these results, this study also investigates whether firms with higher ESG performance have a higher tendency to overinvest. The overall results suggest that although ESG performance has significant positive effects on the firms' opportunity to invest after 2011, this does not necessarily imply that firms with higher ESG performance have a higher tendency to overinvest.