Environmental, Social, and Governance (ESG) Performance and Equity Misvaluation: The Moderating Role of Country-Level Factors

Abstract

This study explores how corporate environmental, social, and governance (ESG) performance affects equity misvaluation and how country-level factors—national culture, environmental performance indicators, and world governance indicators (WGIs)—moderate the relationship between corporate ESG performance and misvaluation. Analyzing a sample of 4407 companies across 33 countries and regions from 2015 to 2022, the research employs a hierarchical linear model due to the nested nature of the data. The findings indicate that better ESG performance is associated with reduced equity misvaluation. Furthermore, drawing on institutional theory, we find that the impact of ESG performance on equity misvaluation varies across different cultural contexts. Drawing on contingency theory, which emphasizes the alignment between internal organizational structures and external situational contingencies, we find that higher national-level environmental performance scores enhance the negative relationship between ESG performance and misvaluation. Additionally, legitimacy theory provides a theoretical framework for our findings regarding the moderating influence of WGIs.