Impact of ESG Factors on Firm Value in Korea

초록

This paper examines the relation between environmental, social, and governance (ESG) practices and firm value using Korean listed firms over the period of 2011 to 2014. This paper hypothesizes that ESG practices have a significant impact on firm value and firm risk. This paper also hypothesizes that ESG practices have a positive impact on a firm’s credit rating. According to research results, a firm’s total ESG score has a negative impact on firm value as measured by Tobin’s Q. Unexpectedly, firm’s environmental practices, including environmental strategy and organization decreased firm value. Furthermore, a firm’s total ESG score has a negative impact on firm risk as measured by abnormal stock return. Firms with better ESG practices are generally more stable with lower potential firm risk. Regarding short-term firm risk, both environmental and corporate governance practices are significant factors. In addition, this paper also shows that firms with high ESG scores show better credit ratings, supporting the negative relationship between ESG practices and cost of debt. In credit rating, social score including employee relationships with the company is significant factor. In conclusion, firms with good ESG practices have a lower cost of debt and short-term risk.

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