MSc Thesis by J.P.C. van Huijgevoort (Universiteit van Tilburg)
MSc thesis: The relationship between ESG-factors and the corporate financial performance
A study for European small capitalization firms.
This study examines how environmental, social and governance (ESG) performance is related to the financial performance of a firm. Although the large amount of previous research a consensus is still not found. This study contributes to this discussion by focussing on small capitalisation firms located in Europe. An empirical analysis consisting of three stages is used to determine if and what factors of ESG have an effect on the corporate financial performance of European small capitalization firms. The results of the first stage indicate a positive effect of the ESG-rating on corporate financial performance. In contrast to this, the second stage analysis provide mixed results. For the subgroup governance performance a positive relation is found while environmental performance has a negative effect on Tobin’s q. Consistent with the second stage the third stage analysis provide mixed results. An increase in the performance of the sub drivers board function and compensation policy results in an increase of corporate financial performance while product innovation and human rights are negatively related with corporate financial performance. Finally, the empirical analysis provides evidence for the moderating effect of firm size on the relationship between ESG and corporate financial performance. The instrumental variable approach is used to overcome existing endogeneity concerns.
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