Influences of Environmental, Social, Governance Performance and Institutional Ownership on Firm Performance: The Moderating Role of Managerial Efficiency

Abstract

This research aimed to study: 1) the relationship between environmental, social, and governance (ESG) performance and firm performance, 2) the relationship between institutional ownership and firm performance, 3) the moderating role of managerial efficiency on the relationship between ESG performance and firm performance and 4) the moderating role of managerial efficiency on the relationship between institutional ownership and firm performance. Firm performance was based on the accounting and market performance of the firm by return on assets (ROA) and Tobin's Q respectively. ESG performance was measured according to the Sustainable Development Goals (SDGs), as promoted by the United Nations in 2019. The samples consisted of 373 companies listed on the Stock Exchange of Thailand. The data were collected from sustainability reports and the SETSMART database for the period from 2016 to 2021, which yielded 2,104 firm-year observations. The statistical methods used to analyze the data were multiple linear regression and Hayes’s regression-based analysis. The research results showed that ESG performance had no relationship with firm performance while institutional ownership had positive relationship with firm performance. In addition, the study revealed that managerial efficiency positively moderated the relationship between ESG performance and firm performance as well as the relationship between institutional ownership and firm performance. Specifically, the study indicated that the positive effect of managerial efficiency on firm performance was stronger when the managerial efficiency was average and above, whereas managerial efficiency showed no statistically significant effect on firm performance when it was below average. The rule of ESG performance can lead to better firm performance if ESG performance can improve the overall efficiency of the firms, which is reflected through managerial efficiency. This research also provides additional information considering the size of the firms included in the analysis. This study provides additional insights into ESG performance data based on the size of businesses. It highlights an intriguing observation that in small-sized companies, engaging in ESG activities can lead to a decrease in company performance. This suggests that for small-sized companies, ESG operations may still pose a relatively high cost when compared to the benefits gained. Conversely, if small firms conduct ESG performance efficiently and achieve high management efficiency, ESG performance will lead to better firm performance as well as large firms. In addition, in small-sized companies, the proportion of institutional investor ownership has a negative impact on company performance. This suggests that in smallsized companies, institutional investors may not effectively serve as external monitors for corporate governance. However, if small-sized companies can attract institutional investors who can contribute to efficient operations, which in this research context refers to achieving high managerial efficiency, they can also improve their overall company performance like larger companies.