The ESG Disclosure and Firm Value: Dynamic Threshold Effects of Corporate Governance and Financial Flexibility

Abstract

This study investigates the dynamic panel threshold effect of Environmental, Social, and Governance (ESG) disclosure on firm value, while examining the critical role of corporate governance effectiveness and financial flexibility as threshold determinants in the relationship between ESG disclosure and firm value creation. The primary objective is to ascertain the extent to which ESG disclosure contributes to firm value creation, as well as to explore the variability of this impact across different levels of corporate governance and financial flexibility. The study is based on secondary data from audited annual and sustainability reports of 94 sampled companies listed on the Nigerian Exchange Group (NGX) from 2016 to 2022. The results from the differential Generalized Method of Moments (GMM) regression revealed a positive significant relationship between ESG disclosure and firm value creation, which indicates that companies that prioritize ESG disclosure can achieve superior financial performance and market valuation. The dynamic threshold model results indicate non-linearpositive effects of ESG disclosure on firm value in organizations with lower governance practices, however, the effect is significantly amplified in firms demonstrating higher governance effectiveness. Also, as financial flexibility increases, the threshold effect of ESG disclosure becomes more pronounced. In firms characterized by low financial flexibility, the contribution of ESG to firm value is minimal. However, as firms enhance their financial flexibility, the positive effects of ESG disclosure become increasingly significant, suggesting that the capacity to invest in ESG initiatives is critical to realizing their value-generating potential. This study offers important insights into the complex interplay between ESG disclosure, corporate governance, and financial flexibility in the context of firm value creation. It is recommended for firms to not only engage in ESG disclosure but to also ensure the alignment of their corporate governance and financial strategy in order tomaximize the resultant value.