Environmental, Social, Governance & Financial Performance Disclosure for Large Firms: Is This Different for SME Firms?

Abstract

This study examines the association between a firm’s environmental, social and governance (ESG) performance and financial performance by examining the extent to which stakeholder and legitimacy theory help explain the effects on explanatory variables used in the study. Moreover, the study makes a novel contribution to existing ESG and performance-based studies by exploring the explanatory effects of ESG and firm performance over ten years. In addition, the study discusses the ESG-performance link of SMEs, thus advancing existing knowledge related to ESG in respect of SME performance. The study uses an extensive Australian sample from Bloomberg’s database from 2007 to 2017, while panel regression analysis is applied to investigate the relationship between a firm’s ESG performance and profitability. The robustness of the results is evaluated after incorporating several robustness checks to address methodological, endogeneity and causality issues related to a firm’s ESG performance disclosure. The empirical findings of this study suggest that improving a firm’s ESG performance is beneficial to all stakeholders of large firms in the long run but not for SME companies. The theoretical model suggests that listed SMEs do not disclose their ESG activities for various reasons, such as a lack of necessary resources. Specifically, the study extends scholarly understanding of existing theory and discusses the significance of the findings for future research.