FROM VALUATION TO VIABILITY: HOW FIRM VALUE AND CREDITWORTHINESS INFLUENCE SUSTAINABILITY?

Abstract

Individual and institutional investors have increased their interest in environmental, social, and governance (ESG). In the last decade, the amount of assets under management in socially responsible investment products has grown. Given the ever-growing importance that Millennial and Z generations have posed and are posing on the theme, this trend is intended to accelerate. This study aims to examine the influential role of firm value and creditworthiness on a firm’s sustainability in an international setting by using the ESG score as an integrated measure of a firm's sustainability performance. There are two theories regarding the impact of a firm’s value and creditworthiness on a firm’s sustainability. The stakeholder theory argues that businesses should consider the interests of all stakeholders, not just shareholders, and that creating value for multiple stakeholders leads to long-term success. Agency theory provides insights into the challenges of managing relationships where decision-making authority is delegated and helps identify strategies to mitigate conflicts of interest and improve organizational performance. To perform empirical tests, the study used an international sample for 5 years between 2017 and 2022. The authors find a positive relation between firm value and creditworthiness with sustainability performance, after controlling for variables that have been found to affect firm sustainability in the existing literature. A higher debt service coverage ratio indicates a lower risk of default thus leading to higher firms’ sustainability. Similarly, firms having good value significantly contribute toward sustainability. Given the growing international capital market and intensifying global competition, the valuation implications of sustainability in an international context are of practical interest to management, investors, and regulators worldwide. The outcome of the research encourages policymakers and management to enhance the firm’s value to contribute well to sustainability. The current paper studies the international variation in market valuation and creditworthiness of firm sustainability performance in terms of the Stakeholder and agency theories on sustainability. The authors explore the relevance of sustainability performance concerning investor protection and the reporting environment across countries.

Keywords: Sustainability, Firm Value, Creditworthiness, Developed Countries