Citation:

Ni Putu Gita Rahmaniati, Erni Ekawati. "The Effectiveness of ESG Implementation in Improving Firm Performance and Earnings Informativeness" International Research Journal of Economics and Management Studies, Vol. 3, No. 5, pp. 263-276, 2024.

Abstract:

This study investigates the effect of Environment, Social, and Governance (ESG) scores on financial performance, earnings informativeness, and market performance. The impact of government regulations on ESG affecting the sensitive industry and the banking sectors in Indonesia is used as a moderating variable. Value enhancing and shareholder’s expense theory compete to explain the value relevance of ESG implementation in this study. Value-enhancing theory implies that ESG practices carried out by companies will be valued positively by the market. However, Shareholder’s Expense theory states that ESG practices are considered to increase costs and generate low market value. The sample of the study is companies listed on the Indonesia Stock Exchange during 2016-2020. Ordinary-, weighted-, and 2-stage-least squares regression models are used to test the hypotheses. The test results show that the ESG scores have a positive and significant effect on ROE and Tobin’s Q. However, companies that are included in the sensitive industry category have a weaker ESG effect on ROE and Tobin’s Q but have higher earnings informativeness. Likewise, companies in the banking sectors have a weaker ESG effect on ROA. Regulators in Indonesia can effectively accelerate the implementation of ESG and increase firms’ earnings informativeness; however, companies that are affected by these regulations will bear greater costs, thereby reducing their performance. This study contributes to the literature by comparing two theories to examine how ESG implementation affects financial conditions and prospects.

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Keywords:

ESG, Income Smoothing, Financial Performance, Market Performance, Earning Informativeness.