ESG performance on the value of family firms: international evidence during Covid-19

The COVID-19 pandemic created a unique environment to study how corporate decisions impact firm value under uncertainty. ESG initiatives, in particular, were scrutinized to determine their impact on financial performance. Prior research yielded mixed results, with some studies showing a positive relationship between ESG performance and firm value, while others reported a negative correlation. Family firms offer a compelling setting for investigating this relationship. The socioemotional wealth (SEW) perspective suggests that family firms might undertake ESG initiatives to enhance their image and reputation, while the stewardship perspective suggests that managers might pursue ESG initiatives to increase company value, aligning with the family's long-term interests. Conversely, 'amoral familism' could lead to prioritizing family economic interests over broader social well-being, potentially hindering ESG adoption. This study aims to investigate the relationship between ESG performance and family firm value during the COVID-19 period, utilizing a global sample and a robust econometric methodology to address potential endogeneity issues.

The literature on the impact of ESG performance on firm value is mixed. Some studies find a positive relationship, suggesting that socially responsible businesses can improve stakeholder relations and increase growth opportunities. Others argue that ESG investments might be costly, leading to investor penalties. Regarding the COVID-19 period, research is inconclusive. While some studies demonstrate that firms with high ESG ratings outperformed others, others show no such relationship or even a negative impact. The literature on family firms and ESG performance is also limited. Some studies suggest that family firms are more inclined towards environmental protection to maintain their SEW, while others note potential conflicts between family economic interests and social well-being. This study seeks to clarify the relationship between ESG performance and family firm value during the pandemic, particularly addressing the contradictory findings in the existing literature.

The study uses an international sample of the 500 largest family firms worldwide from 2015 to 2021, sourced from the Ernest and Young (EY) and University of St. Gallen family Business index. Financial and market data, along with ESG scores, were obtained from Thompson Reuters Refinitiv Eikon. Banking institutions and private firms were excluded. The final sample included 274 publicly traded family firms and 1118 firm-year observations. The key dependent variable was the market-to-book ratio (MtoB), a proxy for Tobin's Q, measuring firm value. The key explanatory variable was the ESG score. A dichotomous variable, COVID, indicated the pandemic period (2020-2021). Control variables included firm size, debt, tangibility, dividends, ownership concentration, cash holdings, and indicators of legal rules and corruption. A dynamic panel data model using generalized method of moments (GMM) was employed to address potential endogeneity issues between ESG performance and financial performance. For robustness, return on assets (ROA) was also used as a dependent variable, and a dichotomous ESG variable (DESG) was employed.

Descriptive statistics revealed significant heterogeneity among the sample firms. The correlation matrix showed a positive and significant correlation between MtoB and the ESG score. Regression results, using MtoB as the dependent variable, consistently showed a positive and statistically significant relationship between ESG performance and family firm performance, even after controlling for various factors. The positive effect of ESG on firm value was evident both during and outside the COVID-19 period. Notably, the negative impact of the pandemic on firm performance was mitigated for firms with superior ESG performance. Similar results were obtained when using ROA as the dependent variable and DESG as the ESG measure, strengthening the robustness of the findings. The study's findings support the hypothesis that improved ESG performance is positively associated with the financial performance of family firms, particularly during times of economic uncertainty. The results suggest that investors may perceive better ESG performance as a signal of better future stock performance, leading to higher firm valuation. The findings also indicate that a higher ESG score helps mitigate the negative impact of external shocks.

The findings provide strong support for the positive impact of ESG performance on the financial value of family firms, particularly during the COVID-19 pandemic. This suggests that investors value ESG performance as a predictor of future performance or as a risk mitigation strategy during uncertain times. The consistent results across different model specifications, including the use of both MtoB and ROA as dependent variables, enhance the reliability of these findings. These results are consistent with previous research showing the benefits of ESG performance for corporate valuations, but this study further clarifies the impact on a specific type of company, family firms, during a significant period of global uncertainty. This research contributes to the growing body of evidence highlighting the link between ESG and firm value, providing valuable implications for investors and managers of family firms.

This study contributes to the literature by providing novel evidence of the positive relationship between ESG performance and financial success of family firms during the COVID-19 pandemic. The research offers actionable insights for investors and managers, emphasizing the importance of robust ESG performance for enhancing value and mitigating the adverse effects of external crises. Future research could expand the sample to include non-family firms and explore other theoretical frameworks, such as agency theory, to further understand the underlying mechanisms driving this relationship. Investigating potential non-linear relationships between ESG performance and family firm performance also presents a promising avenue for future research.

The study is limited to a sample of family firms, potentially limiting the generalizability of the findings to other types of firms. The reliance on a single database for ESG data might introduce limitations in terms of data comparability. The study's focus on a specific time period (2015-2021) might not fully capture the long-term effects of ESG performance. Future research could address these limitations by expanding the sample, using multiple data sources, and conducting longitudinal studies to examine the longer-term impact of ESG.