1. Introduction
The concept of corporate social responsibility (CSR) has broadened from the areas of ethics, governance, corporate philanthropy, and volunteerism to include sustainability, hence the term corporate sustainability. However, the academic community uses CSR, environment social governance (ESG), and corporate sustainability performance (
CSP) interchangeably [
1,
2]. Corporate sustainability is an alternative to the traditional growth- and profit-maximization model that benefits only the shareholders. While corporate sustainability recognizes that corporate growth and profitability are important, it also requires the corporation to pursue sustainable development, which balances the need for economic growth with environmental protection, social justice, and equity, hence, placing firms at an economic advantage by benefiting all stakeholders including shareholders.
In this study, our main objective is to explore the influence of corporate sustainability performance (
CSP) in Asia on investment efficiency by which corporate value is generated. We further identify which individual components of
CSP matter the most in improving investment efficiency. With more investors considering companies’ corporate sustainability (economic, environmental, social, and governance) performance (
CSP) when making their investment decisions, many companies worldwide, including those in Asia, have started to adopt stakeholder-oriented strategies to increase both the firm and social value. Corporations are now investing efforts in internal improvement in enhancing their corporate sustainability performance (
CSP) to stay competitive. High
CSP is associated with higher firm performance [
3,
4,
5], easier access to finance [
6], and lower cost of equity [
7,
8]. Hence, the need for examining the effect of
CSP on firm investment efficiency in Asia is timely. The existence of a research gap in examining the factors that affect investment efficiency is in need of further investigation, given the rapidly developing global conditions that require companies to make the right investment decisions. Further, empirical results suggest that the benefits to a firm of increased corporate sustainability involvement remain mixed.
The value-enhancing view based on the stakeholder theory posits that companies need to make efficient investment decisions whereby firms simultaneously create value for different stakeholder groups rather than merely those of shareholders [
9,
10]. High-
CSP firms have been seen as strategically effective in meeting the demands of these diverse stakeholder groups [
4]. Further, low information asymmetry between managers and stakeholders can reduce the costs of raising funds and efficient investment selection [
11]. In fact, a firm engaged in corporate sustainability activities will enhance its long-term value through increased transparency by disclosing more transparent and reliable information, enhanced brand value, motivated employees, supportive corporate information, and a “greener” production process, among others. The study by [
12] provides evidence that stakeholder relationship capability, because of equity of information and knowledge among stakeholders, enhances investment efficiency. Other studies by [
13,
14,
15,
16] have also found that higher-CSR-involvement firms experience lower information asymmetry and higher stakeholder relationships, hence increasing investment efficiency.
In contrast, the agency theory argues that managers with high CSR involvement are self-interested and tend to invest inefficiently to expropriate some firms’ existing resources. Refs. [
11,
17,
18,
19] are some studies that raise the problem of information asymmetry between management and financial institutions and agency conflicts between management and shareholders, which likely increase investment inefficiency. Other scholars [
20,
21] also argue that companies with high
CSP involvement are more likely to create a competitive disadvantage compared to their less socially responsible counterparts due to its unnecessary costs, and the conflict created between different stakeholders.
Our study provides new findings to bridge the gap in the general corporate sustainability literature relative to the lack of consensus on the investment efficiency impacts of
CSP. In light of the rapidly changing landscape of
CSP in Asia, this study contributes to the body of knowledge by extending key dimensions in the literature in investigating the influence of corporate sustainability performance on investment efficiency in Asian markets. This enhances generalisability compared to single-market studies. We further identify which dimensions of
CSP (environmental, social, and governance) best improve investment efficiency by which firm value is generated. The need for
CSP–investment-efficiency relationship research in Asia is deemed important as Asia’s economic transformation in recent decades has been unprecedented in pace and scale, which has attracted increased participation by foreign and domestic investors. According to UNCTAD’s World Investment Report 2022, foreign direct investment (FDI) in developing countries in Asia increased by 19% to an all-time high of USD619 billion in 2021 [
22]. More than 80% of FDI inflows went to China as the main recipient, followed by Hong Kong (China), Singapore, India, United Arab Emirates, and Indonesia.
Finally, the findings in this study have important practical implications for investors and policymakers. Given the importance of investment as both the determinant of growth and as a major determinant of the return on capital obtained by investors, our work contributes to the investment community which will benefit from an improved understanding of how enhancing CSP activities will influence investment activities in the Asian market. These insights about the impact of CSP on investment decisions will also be useful to policymakers to construct a roadmap for reform priorities. As our results show that the social dimension significantly improves investment decisions, policymakers should focus on the social dimension to improve the overall performance of sustainability. Policymakers need to ensure that companies are dedicated to taking good care of people inside and outside the business, such as the stakeholders, employees, and the local community.
Our result coincides with both stakeholder theory and information asymmetry theory where economic, environmental, social, and governance involvements play a vital role in investment efficiency. In other words, firms with high CSP activities enjoy low information asymmetry and high stakeholder solidarity, hence improving firm decisions to invest in profitable projects. Our results further show that the social dimension significantly improves investment decisions, unlike dimensions associated with environment and governance, which show no significant effect on investment efficiency. The results of this study highlight the important role that corporate sustainability performance plays in shaping firms’ investment behaviour and efficiency across Asia.
The remainder of the article is organized as follows: the literature review and hypothesis development are described in
Section 2, followed by the subsequent data and sample selection in
Section 3, and methodology in
Section 4.
Section 5 provides a discussion of empirical results and
Section 6 concludes and synthesises the study.
3. Data
Our main data on corporate sustainability performance (
CSP) for the period 2012 to 2019 are extracted from the Thomson Reuters ASSET4, now known as ASSET4/Refinitiv ESG [
43]. The information on the control and dependent variables requiring the firm’s financial statement items are also gathered from the same datastream. Our initial sample consists of 28,582 firm-year observations. We then matched these data against ASSET4 and
CSP-related data, resulting in a final sample of 9218 Asian publicly listed companies with a total of 26,838 firm-year observations as shown in
Table 1.
The Thomson Reuters ASSET4 database collects extensive sustainability data from international companies which are rolled up into various performance indicators and further aggregated into a framework of 18 categories. Then, category scores are grouped into four pillars: governance, social, environmental, and economic performance. The environmental (SUS_ENV) pillar measures various inputs on living and non-living natural systems such as emissions, pollution, and hazardous waste to avoid risk. The corporate governance (SUS_CG) pillar measures corporate systems and processes to assure that the company’s executives and board members perform in order to generate long-term shareholder value. The social pillar (SUS_SOC) measures a company’s capacity to generate trust and loyalty among employees, customers, and society. The economic pillar measures corporate abilities to efficiently use resources to generate a high return on investment and sustainable growth.
The scores or ratings in each pillar range from 0 (for companies that do not disclose the respective data) to the highest disclosure level of 100 (for companies that disclose every data point collected) [
4]. The Thomson Reuters Asset 4 also provides the overall score of corporate sustainability performance (
CSP) as the mean of the four pillars. The equal-weighted overall score implies that all pillar scores are of equal importance, thus reflecting a balanced view of corporate performance in the four pillars.
4. Methodology and Regression Models
Investment efficiency measures the ability of the company to undertake those projects with positive net present value (NPV) and reject all projects with negative present values. Similar to the method adopted by previous studies, e.g., [
14,
21,
25,
40], investment efficiency is estimated as a function of growth opportunities measured by sales growth.
where
Investmenti,t is the total investment for firm
i in year
t, calculated as a net increase in property, plant and equipment, and intangible assets and scaled by the lagged book value of total assets of firm
i in year
t (similar to the measurement used by [
40]). Sales
growthi,t−1 is the percentage change in sales for firm
i in year
t − 1 to
t. We initially estimate Equation (1) cross-sectionally by year and industry. The absolute value of residuals from the regression model in Equation (1) is used as our proxy for deviations from the expected investments, that is, investment inefficiency (
INEFF_INV) in Equation (2). Higher absolute values of residuals represent higher levels of inefficient investment.
We analyse the impact of
CSP on investment efficiency among Asian publicly listed firms using the following model with clustered robust standard errors to correct for cross-sectional and time-series dependence [
42].
where
INEFF_INV is the absolute value of the residuals from Model 1 in year
t. A positive association between corporate sustainability performance (
CSP) and inefficient investment (
INEFF_INV), the residual from the investment Model 1, indicates that
CSP increases investment inefficiency. In contrast, a negative
CSP–
INEFF_INV relationship suggests that
CSP decreases investment inefficiency. That is, firms with higher
CSP activities are expected to deviate less from inefficient investment and consequently have enhanced investment efficiency.
SUS_ENV is the environmental score, which considers various inputs on living and non-living natural systems such as emissions, pollution, and hazardous waste. SUS_CG is the corporate governance pillar, which measures a company’s systems and processes which include, among others, information such as board structure and function, board committee activities, and company political involvement. SUS_SOC is the social pillar, which measures a company’s capacity to generate trust and loyalty with its workforce, customers’ rights and complaints, and social issues such as human rights through its use of best management practices.
Data for SUS-ENV, SUS_CG, and SUS_SOC are obtained from the Thomson Reuters ASSET4 database. Each pillar score ranges between 0 and 100, with higher scores being more desirable in terms of corporate sustainability performance. Also, we used the aggregate measure (mean of the four pillars) provided by this database for the total corporate sustainability performance (CSP). Hence, the CSP reflects an equal-weighted rating of a company’s financial performance in four areas: economic, environmental, social, and corporate governance pillars.
Since our hypothesis H1 predicts that CSP enhances investment efficiency, we expect B1 to be negative and statistically significant. Similarly, our hypotheses H2 (H2a, H2b, and H2c) predict that the individual components of corporate sustainability performance (environment, governance, and social) are positively related to investment efficiency. Hence, we expect B2, B3, and B4 to have a negative and statistically significant effect on INNEFF_INV.
To reduce the possibility that investment efficiency is a function of correlated omitted variables, we include several control variables to better isolate the effect of
CSP on investment efficiency [
14,
25,
44,
45]. The proxy for firm size
(SIZE) is the natural logarithm of total assets. Larger firms may take advantage of economies of scale to have access to the capital market in an easier and cheaper way to fulfill their financing needs. Further, large-sized firms are more diversified, have lower cost of capital, and employ better technology that could contribute positively to enhancing firm value through investment efficiency [
40]. Hence, we expect
B5 to be negative and statistically significant.
ROA (Return of assets) denotes the ratio of net income to total assets.
FIN_PERF (Financial performance) represents the market value of equity minus book value of equity plus the book value of assets. Both
ROA and financial performance are proxies for measuring management effectiveness in asset utilization. A higher asset utilization ratio can either lead to lower or higher investment inefficiency [
14]. Similar to [
14,
40], we do not predict the sign of the correlation between
ROA and
FIN_PERF, and investment inefficiency, respectively.
FIN_LEV (Financial leverage), the amount of debt used to finance a firm’s assets and projects, is measured by the ratio of total debt to total assets. Ref. [
28] argues that when debt level is too high, it will stimulate excessive (over) investment in negative NPV projects and reduce investment efficiency. However, debt financing can also be utilized as an instrument to curtail the over-investment problem by forcing managers to pay out excess funds to service debt. Hence, we do not predict the sign of the correlation between
FIN_LEV and
INNEFF_INV.
INFOR_ASY (information asymmetry) denotes the bid–ask spread of the [
46] model and is measured as follows: AP is the average ask price and PB is the average bid price. As managers have more information about companies and investment opportunities than external parties, managers who are self-interested may cause corporate managers to under or overinvest, leading to investment inefficiency.
INV (Investment) is the total investments.
CFO is a proxy for cash-flow sensitivity, measured by the total cash and short-term investments and scaled by the book value of total assets. Refs. [
14,
40] suggest that firms with higher cash-flow volatility are likely to undertake inefficient investments due to information asymmetry and agency problems.
SALEGROWTH (Sales Growth) is the rate of change in sales from t − 1 to t. Growth ability reflects the future potential and market value of companies. High-growth firms have more investment opportunities so they easily to fall into excessive investment. On the contrary, the impact of financial leverage on low-growth firms is more underinvestment.
AGE reflects the natural logarithm of the firm age. Ref. [
14] argues that older firms are more likely to have better investment experience than younger firms, and hence better investment efficiency. However, Ref. [
40] claims that older firms tend to undertake inefficient investments when they have more investment experience and more cash flow.
Lastly, CASH represents the ratio of cash to total assets from firm
i in year
t. Based on the information asymmetry and agency problem views, firms with more financial resources tend to undertake inefficient investments [
14]. On the contrary, firms with excess cash-flow volatility are more likely to invest in more positive NPV projects, hence decreasing investment inefficiency [
40].
To address potential year-, industry-, and country-specific effects, three dummy variables, Year, Industry, and Country, are included in the analysis.
5. Empirical Results
Achieving the goal of this study requires, first of all, an analysis of the investment efficiency of the sample firms. The descriptive results in
Table 2 show that investment inefficiency (
INEFF_INV) for our Asian data has a mean of −0.03, ranging from −0.25 to 0. Further,
INEFF_INV records a median of −0.02, suggesting the residuals from the investment model are normally negative but at a smaller magnitude. The mean and median score for
INEFF_INV in this study are close to the results found in the study by [
14] in the US.
Further analysis in
Table 2 shows that there is significant panel-data variation in
CSP for the Asian firms ranging from 0.31 to 92.8 and with a mean and median score of 40.1 and 39.08, respectively. The medians for individual components of
CSP (environment, social, and governance) are 33.33, 33.40, and 48.28, respectively. The mean and median score for the composite
CSP in this study is not too far from the results found in the study by [
4] in examining the economic, environmental, and social (EES) sustainability performance among Asian firms during the period 2005–2017. Using the KLD rating database, ref. [
14] found that the median for the overall CSR score and individual components of CSR among the US firms in their sample equal 0, ranging from −9 to 18. The rest of the data in
Table 2 portray the descriptive statistics for the control variables.
Table 3 reports the Pearson pair-wise correlation coefficients between all variables in our sample. As expected, the
CSP indicator variable is significantly and negatively correlated with
INEFF_INV (correlation of 0.134). This result provides initial support for H1 that firms with high
CSP are positively related to efficient investment.
INEFF_INV is also significantly and negatively correlated with
SUS_ENV, SUS_SC, and
SUS_CG. We also find that the investment inefficiency is significantly related to most of our control variables, providing assurance on the relevance of our variables. Initial results show that investment inefficiency is negatively related to size, financial leverage, information asymmetry, sales growth, and age. No significant relationship is found between
INEFF_INV and financial performance, and cash. Further, the results do not find a high correlation between all the explanatory variables, indicating that our regressions do not suffer from any multicollinearity concerns.
Using OLS with standard errors corrected for heteroscedasticity and clustered at the firm level, the results of estimating Model 2 are presented in
Table 4. The estimated coefficient of
CSP (corporate sustainability performance) is negatively significant (at the 1% level) with investment inefficiency (
INEFF_INV), indicating that an increase in
CSP leads to lower investment inefficiency. Our result finds support for our hypothesis H1 that firms with high
CSP are positively related to efficient investment. Paralleling previous studies [
13,
14,
16,
21,
44], our results in
Table 4 indicate that high corporate social performance (
CSP) improves the firm’s overall investment efficiency.
Further analysis shows that among the individual components of CSP, only the sustainability social dimension (SUS_SOC) has a positive effect on investment inefficiency. The estimated coefficient of SUS_SOC is negatively significant (at the 1% level) with INEFF_INV, indicating that an increase in the sustainability social dimension (SUS_SOC) leads to lower investment inefficiency. Hence, we accept our hypothesis H2c that the social components of corporate sustainability performance are positively related to investment efficiency. However, the estimated coefficient of the sustainability environmental dimension (SUS_ENV) is negative but not significantly related to INEFF_INV. Hypothesis H2a, that environmental components of CSP are positively related to investment efficiency, is thus rejected. Similarly, the estimated coefficient of the sustainability governance dimension (SUS_CG) is negative but not significantly related to INEFF_INV. Hence the result rejects hypothesis H2b that governance components of CSP are positively related to investment efficiency.
We also document several significant relations between the control variables and investment inefficiency. In contrast to the findings by [
14,
40], the estimated coefficient on firm size (
SIZE) is negative and significant. The results indicate that large-sized firms are more diversified, and have lower costs of capital due to their economies of scale to deviate less from investment inefficiency. The significant negative coefficient of
ROA indicates that management effectiveness in asset utilisation leads to less investment inefficiency. Other control variables that have negatively significant coefficients include SALESGROWTH and AGE. This result is consistent with the expectation that high growth and older firms have more investment opportunities and experience to invest in positive NPV projects. The coefficient of
INFOR_ASY is significantly positive with
INEFF_INV. The positive relationship between information asymmetry and investment inefficiency indicates that lower information asymmetry between management and outside providers leads to lower investment inefficiency.
In summary, our results provide strong evidence that high CSP involvement among Asian firms decreases investment inefficiency and consequently increases investment efficiency. Further analysis indicates that CSR components that are directly related to the social dimension are more relevant in reducing investment inefficiency compared with those related to environment and governance. Indeed, the social responsibility programs that organizations carry out with other entities or on their own initiative generate social benefits that can be converted into market opportunities and long-term profits. A firm’s relationships and confidence-building among its employees to generate trust and loyalty among its workforce, community involvement such as human rights, and product characteristics for customer satisfaction have a positive impact on society and local communities they operate in. These stakeholders (investors, employees, customers, suppliers, human rights, and community) have a direct effect on the corporation’s operations and activities and are directly affected by the corporation’s activities. Compared to environmental and governance components, these stakeholders are more interested in the company’s investment decisions. Hence, investing in relationships with these stakeholders will increase competitive advantage and increase firm value through investment efficiency.
The results also show that CSP firms associated with larger size (SIZE), efficient use of assets (ROA), lower information asymmetry (INFOR_ASY), high sales growth (SALESGROWTH), and older firms (AGE) enhance firm value through investment efficiency.
6. Conclusions
Given the importance of investment efficiency in determining the corporate value for market development, and that information asymmetry and agency problems are persistent concerns in relation to investment efficiency, we examine whether CSP influences investment efficiency in Asian markets. Using a large sample of 26,838 firm-year observations that represent 9218 Asian listed companies over the period of 2012–2019, the results of this study highlight the important role that corporate sustainability performance plays in shaping firms’ investment behaviour and efficiency across Asia. We found statistically significant evidence that firms with higher CSP increase investment efficiency. In line with the value-enhancing view of the stakeholder theory and information asymmetry, attention to stakeholders and abundant disclosed information in CSP firms reduce financial risk, which helps to enhance investment efficiency.
Further, unlike the environmental and governance dimensions, the social dimension of sustainability performance is well perceived and plays the most important role in improving investment efficiency through high employee loyalty, good reputation, and consumer confidence in product quality. A high performance score in social involvement firms reduces idiosyncratic (firm) risk, which leads to higher investment efficiency.
From a theoretical perspective, the findings in this study provide compelling evidence that sheds light on the debate regarding the value implications of
CSP. Consistent with enlightened stakeholder theory and the low information asymmetry [
31,
32] that high-
CSP firms enjoy, our findings suggest that by addressing the needs and contributions of various stakeholders, managers commit themselves to enhanced monitoring that leads to investment efficiency. This is in contrast to
CSP detractors’ arguments that CSR may be a source of agency conflicts. Our study also complements the broader
CSP–firm-value literature which is widely focused on developed Western markets by investigating whether investment efficiency might be a channel by which corporate value is generated in Asian markets. While previous studies of the
CSP–investment nexus in Asia mostly examine a single market, e.g., [
40,
41], this study examines ten emerging Asian markets, which may enhance the generalizability of the results to other emerging markets.
Refs. [
37,
47] argued that the institutional framework of a country may influence the components of
CSP scores and moderate the relationship between
CSP and firm value. Hence, future research should examine how differences in institutional environments through its regulative component (i.e., shareholder-oriented and stakeholder-oriented countries) influence the link between
CSP and investment efficiency.