The Moderating Role of Technological Innovation on Environment, Social, and Governance (ESG) Performance and Firm Value: Evidence from Developing and Least-Developed Countries

Abstract

Recently, there has been growing recognition of the significance of environmental, social, and governance (ESG) factors in assessing a company’s performance and worth. Previous research has failed to take into account the significant impact of technological innovation in their empirical investigations. This study fills the gap by investigating the moderating impact of technological innovation on ESG performance and company value in developing and least-developed countries. The study utilized secondary data from 78 pharmaceutical companies from 2009 to 2022. For the investigation, we used the pooled mean group (PMG) and generalized methods of moments (GMM) estimators. The findings reveal that environmental and social performance influence firms’ value; however, governance performance does not influence firms’ value. Additionally, technological innovation acts as a catalyst, strengthening the favorable influence of ESG performance on firm value. The findings affirm the need to incorporate technological innovation, as it enables pharmaceutical firms to implement more efficient and sustainable practices.

1. Introduction

In the dynamic landscape of developing economies, where economic development intertwines with social progress and environmental preservation, the concept of ESG performance has emerged as a driving force shaping the region’s business landscape [1]. With growing global awareness of the pressing need to address environmental and social challenges, while ensuring sustainable and responsible business practices, stakeholders are increasingly recognizing the value of ESG performance in evaluating the long-term prospects and resilience of firms operating in this region.

Recent decades have seen a rise in the performance of ESG by companies as they strive to include stakeholders and adapt to competitiveness in their particular sectors [2]. Sustainability adoption is a dynamic and complex process throughout time. Some businesses exploit it to achieve an edge over their competitors, while others see it as a standard routine. Companies all around the globe willingly participate in more sustainability practices nowadays to improve their market value [3]. As technological innovation continues to reshape industries and economies, it becomes imperative to explore the potential moderating role it plays in the association between ESG performance and firm value [4]. This intriguing interplay between ESG performance and technological innovation holds the promise of uncovering new avenues for sustainable growth, fostering social progress, and securing environmental sustainability in the business ecosystem.

This study on the impact of ESG performance on firm value in developing and least-developed economies, with a focus on the moderating role of technological innovation, holds significant importance for multiple stakeholders. Investors prioritize sustainable and resilient investments, as firms with strong ESG performance tend to exhibit better risk management, operational efficiency, and stakeholder engagement, leading to enhanced financial performance and value. Regulators aim to promote responsible and sustainable business practices aligned with international standards. Consumers are increasingly conscious of the environmental and social impact of their consumption and support companies committed to ESG principles.

As the demand for sustainable business practices continues to rise, ESG performance has emerged as a critical instrument for securing corporate sustainability in recent years; however, there still exists limited consensus on how ESG performance affects firm value even though its significance is expanding around the globe. The majority of prior studies relied on stakeholder and resource-based views (RBV), institutional and legitimacy theories, and focused their studies on ESG and firm performance and profitability [5,6]. The limited studies on ESG and firm value were performed either on country-based analysis [7,8] or comparative studies between randomly selected countries [4,9]. In addition, the moderating role of technological innovation on ESG performance has not received attention even though it is increasingly recognized as a driving force behind sustainable business practices and economic development. None of the theoretical frameworks and empirical studies have looked at the interplay between ESG performance, firm value, and technological innovation, particularly from an industry perspective on a regional basis. This gives rise to a significant literature gap.

This research aims to examine the influence of ESG performance on firm value in the context of developing and least-developed countries, taking into consideration the moderating role of technological innovation. We used stakeholder and legitimacy theories to examine the impact of ESG performance on firm value. This is because the stakeholder theory helps in understanding how ESG performance affects the perceptions and relationships of various stakeholders, while the legitimacy theory explores how ESG performance affects the perceived legitimacy of a firm among stakeholders and how this legitimacy ultimately contributes to firm value [10]. By considering these theories, this study aims to analyze how ESG performance, stakeholder relationships, and legitimacy interact to influence firm value in the specific context of emerging economies.

This study’s innovation first lies in it incorporating the role of technological innovation as a moderating factor, which is vital in capturing the potential synergies between sustainable practices and technological advancements, which have the potential to shape the competitive advantage and long-term viability of firms operating in developing and least-developed countries. Secondly, contrary to prior studies that use the traditional methods of measuring firm value using profitability indicators, such as ROCE, ROA, and Tobin’s Q, this study goes a step further by incorporating stock price as a measure of firm value. A company’s stock price helps in gauging the fiscal health, market performance, and general viability as opposed to using ROA or ROCE to assess the financial performance [11]. According to [12], because stock prices factor in forward-looking performance, it helps to indicate the economy’s direction if earnings estimates are accurate; hence, the stock price gives an accurate value for the firm rather than the traditional profitability indicators, which only provide the financial performance of the firm without considering the firm’s value.

Thirdly, this study adopted an innovative index to measure each ESG theme separately, which is contrary to prior studies that measure ESG elements combined.

This study used quantitative methodology to conduct an empirical investigation. Given the availability of data, 78 pharmaceutical firms from central and southern Africa were used for the study. The annual reports and financial statements of the chosen companies from 2009 through 2022 were used to gather secondary data. The GMM estimator was used in the research as its main technique of estimate, while the PMG estimator served as its robustness test. Stata version 17.0 was utilized in running the analysis for this study. The findings reveal that environmental and social performance positively enhance firm value; however, governance performance does not influence firms’ value for pharmaceutical companies in developing and least-developed countries. Additionally, technological innovation is shown to have a favorable moderating role in the relationship between environmental performance and firm value, as well as social performance and firm value.

This research offers three significant contributions. First, it deepens our knowledge of the connection between ESG performance and firm value in developing and least-developed countries by offering insightful information on how these variables affect companies’ performance and overall worth in this region by exploring how each theme of ESG performance independently influences firm value. Second, the study explores the moderating influence of technological innovation—a significant but disregarded factor—on the association between ESG and business value. By recognizing the influence of technology, the study unveils additional dimensions to the complex interplay between sustainability practices and corporate success, paving the way for more nuanced strategies for businesses in the region. Finally, the findings of the study also have practical implications for businesses, policymakers, and investors, enabling them to develop more informed and tailored approaches to enhance sustainable practices and make responsible investment decisions in the dynamic and emerging market landscape of developing and least-developed countries.

The remainder of the research is structured as follows: the theoretical framework and the literature review are presented in Section 2. Section 3 centers on the study’s methodology, Section 4 on the findings and analysis, and Section 5 on the conclusions and implications.

2. Literature Review

2.1. Theoretical Literature

2.1.1. Stakeholder Theory

The theory of stakeholders contends that for a company to succeed, it must take into consideration the interests of parties outside its owners. Stakeholder theory, which emphasizes the significance of considering environmental, social, and governance concerns, becomes pertinent in the setting of this study [13]. Companies may improve their image, reduce risks, and draw in socially aware investors by incorporating ESG factors into their operations. To increase resource usage efficiency, transparency, and stakeholder involvement, technological advancement plays an influential role [14]. It promotes ethical behavior and accountable governance, enhancing stakeholder connections and firm value [15]. In the end, this integration aids businesses in achieving ESG principle alignment, legal compliance, and market competitiveness.

2.1.2. Legitimacy Theory

According to legitimacy theory, organizations work to preserve a favorable reputation by conforming their behavior to accepted social standards [16]. The principle of legitimacy requires businesses to demonstrate their actions that align with prevailing social norms. The theory prioritizes societal interests over organizational interests [10]. Companies may improve their ESG performance and satisfy societal sustainability expectations by embracing cutting-edge technology, which will boost their credibility and reputation [17]. By encouraging cost reductions, operational effectiveness, and long-term financial success, technological innovation further enhances the association between ESG performance and business value. In the end, incorporating technology innovation into ESG practices aids businesses in establishing credibility, enhancing performance, and creating value in the dynamic business environment.

2.2. Empirical Review and Hypotheses Development

Companies may strengthen their legitimacy and reputation through the stakeholder theory, as the theory emphasizes the significance of taking into account the expectations and interests of stakeholders, including regulators, workers, communities, and investors, when forming a company’s ESG policies, which will in turn increase the company’s financial performance and profitability by meeting the requirements of these stakeholders responsibly and sustainably [18]. Businesses actively embrace and incorporate sustainable practices, such as cutting carbon emissions, fostering diversity and inclusion, and guaranteeing ethical supply chain management, to improve their legitimacy and earn public approval in the context of ESG performance. This, in turn, enhances the company’s financial performance [19]. Drawing from the stakeholder theory, effectively integrating technological innovation into ESG processes not only helps businesses satisfy social sustainability standards, but also strengthens their credibility by highlighting their dedication to ethical business conduct. This, in turn, helps raise the value of the company [20]. Companies may improve their reputation, establish connections with stakeholders, and ultimately raise firm value sustainably by using technology innovation to improve ESG performance and stakeholder engagement [21].

Numerous studies have examined the connection between environmental disclosure and business value using financial performance. For instance, the author of [22] discovered a favorable association between corporate financial performance and environmental disclosure. In terms of stock market performance and return on equity, it was shown that businesses with good environmental disclosure practices outperformed their competitors. Similarly, the author of [23] discovered that corporate environmental disclosure initiatives considerably increase a company’s profitability. This was further supported by [24], who revealed that environmental performance and corporate financial profitability were shown to be positively correlated. On the contrary, Ref. [25]’s results show that in most instances, a strong ESG performance does not guarantee a financial return for the company in terms of both value and profitability.

In addition, social disclosure and firm performance have revealed mixed conclusions from prior studies. For example, Ref. [26] demonstrated that businesses with high social disclosure ratings outperformed firms with low social disclosure ratings in terms of financial performance. Similar to this, the authors of [26] showed that companies that performed well in terms of corporate social responsibility (CSR) had better profitability than those that performed poorly. This was supported by [27], who discovered that social disclosure favorably enhances financial performance. On the contrary, Ref. [28] found no connection between environmental performance and corporate profitability, indicating that environmental performance may not always result in better financial results.

Moreover, the governance systems of firms influences their sustainability and information disclosure [29]. This is apparent in the long-term influence of the performance of the firm. For instance, the authors of [30] showed that companies with superior governance disclosure had better operational efficiency, more financial success, and higher market value. Similarly, Ref. [31] found that high governance performance significantly impacted businesses’ financial success, particularly through the mediating effect of customer loyalty and satisfaction. This was supported further by [10], who discovered that there is a greater link between governance investment and corporate financial performance in developing and least-developed countries compared to industrialized countries, suggesting that the effect of governance investment on business performance may vary depending on the kind of economic environment. Conversely, Cohen [32] also discovered an insignificant link between governance disclosure and firm profitability, suggesting that the impact of governance disclosure on business profitability varies according to the environment and sector.

Furthermore, technological innovation is seen as a key player in ensuring a firm’s economic and environmental sustainability. The study by [33] revealed that companies with CSR practices and technical innovation outperformed those without them in terms of corporate financial success. Again, the results of [34] show that the companies with superior economic performance were those that successfully integrated environmental issues into their innovation processes. This suggests that innovative companies, as well as those who are socially and environmentally conscious, tend to have higher profitability. Contrarily, Shang [35] discovered that technical innovation insignificantly strengthens the link between CSR and corporate value, indicating that its influence on the connection between CSR and business performance may be constrained.

On the basis of the literature above, we hypothesize the following:

H1: 

Environmental performance contributes favorably to the firm value of developing and least-developed countries.

H2: 

Social performance positively influences firm value in developing and least-developed countries.

H3: 

Governance performance positively affects firm value in developing countries.

H4: 

Technological innovation positively influences the effect between environmental performance and firm value.

H5: 

Technological innovation positively influences the effect between social performance and firm value.

H6: 

Technological innovation positively influences the effect between governance performance and firm value.

3. Methods

3.1. Sampling and Data Source

The researchers utilized a quantitative study approach and relied on secondary data extracted from the sample firm’s annual reports, sustainability reports, and financial statements, spanning from 2009 to 2022. The study chose the pharmaceutical industry in central and southern Africa due to its contribution to environmental pollution [36]. Since the pharmaceutical industry uses chemicals in their production, the method and manner in which these chemicals are disposed of have an impact on the environment [37]. In addition, some of the chemicals used in the pharmaceutical industry are hazardous in nature, and can therefore cause harm to the environment if not handled with care [38]. As such, in handling these chemicals during manufacturing, the firms have to take into consideration the impact on the environment and the society; hence, this study will provide a policy guide for policymakers in the pharmaceutical industry to ensure environmental and social protection while engaging in economic activities by the pharmaceutical firms. Purposive sampling was used to select countries with a stable political regime in the last ten years. Since none of the four and seven countries in central and southern Africa, respectively, has experienced any political unrest, the study considered all eleven countries within the two sub-regions. We then selected the companies with readily available datasets from these countries. Domestic pharmaceutical companies were considered in this study. We used 78 companies from 2009 to 2022 with available data for the study. The study considered ESG performance as a proxy for the independent variable and firm value, measured using stock price as a proxy for the dependent variable. Technological innovation serves as the moderator in this study, which was measured using investment in R&D. We utilized Stata 17.0 in conducting the analysis.

3.2. Measurement of ESG Performance

The effectiveness of an organization’s ESG (environmental, social, and governance) efforts are gauged by its ESG performance score. Organizations may show their commitment to sustainable practices and responsible corporate citizenship by putting an emphasis on and improving their ESG performance, which increases their long-term value and resilience in a market that is becoming more ethically aware. A checklist was created using the content analysis approach to evaluate the ESG performance based on separate components [39,40]. We then used a coded element for each dimension. Environmental performance is given as (EP); (SP) represents social performance; and (GP) represents governance performance. The performance status of each ESG index component was analyzed by comparing the annual reports to the elements on the checklist. Drawing from the content analysis, metrics that align with the United Nations’ sustainable development goals and the Global Reporting Initiative (GRI) were incorporated into these measurements. Seven items were used to measure both environmental and social performance, and eight items were used to measure governance performance. For each of the items in the checklist, we searched with the keywords in the ESG checklist. If the item appeared in the search results, we read to confirm if the disclosure was in line with the checklist content. If an item on the checklist was fully disclosed or reported in the annual report, we assigned a score of 2 points. If an item was mentioned or disclosed partially, a score of 1 point was assigned. For no disclosure of items in the checklist, we assigned a 0 score. Per the ESG framework, the checklist includes three themes, namely, environment, social, and governance.

Table 1. Checklist for ESG performance index.

CODING ELEMENT	DIMENSIONS	RELATED LITERATURE
Environmental performance (EP)	EP1. Carbon emissions (total emissions, intensity, reduction targets)	[41,42]
	EP2. Pollution control measures
	EP3. Renewable energy usage
	EP4. Biodiversity conservation efforts
	EP5. Energy consumption and efficiency
	EP6. Water usage and conservation efforts
	EP7. Waste management (recycling rates, waste-reduction initiatives)
Social Performance (SP)	SP1. Employee turnover and retention rates	[41,43]
	SP2. Community engagement and social investments
	SP3. Philanthropic initiatives and donations
	SP4. Supply chain labor standards and practices
	SP5. Health and safety records
	SP6. Employee diversity and inclusion (gender, ethnicity, age, etc.)
	SP7. Training and development programs
Governance Performance (GP)	GP1. Board composition (independence, diversity, expertise)	[41,43]
	GP2. Executive compensation and pay ratios
	GP3. Shareholder rights and engagement
	GP4. Risk management and mitigation strategies
	GP5. Ethics and business conduct policies
	GP6. Transparency of financial reporting
	GP7. Anti-corruption policies and practices
	GP8. Regulatory compliance record

provides a summary of the checklist for ESG measurement.

The equation used for calculating the ESG performance index independently is given as:

$$EP=\frac{Number of enviromental items reported in the annual report}{The total number of enviromental items on the disclosure check list}$$

(1)

$$SP=\frac{Number of social items disclosed in the annual report}{The total number of social items on the disclosure check list}$$

(2)

$$GP=\frac{Number of governance items reported in the annual report}{The total number of governance items on the disclosure check list}$$

(3)

3.3. Model Specification

Using multiple regression, the authors created two research models to analyze the association between the performance of ESG and the firm value. The study adopted and improved a model by [9] given in Equations (4) and (5).

$$F{V}_{it}=ƒ\left(E{P}_{it},S{P}_{it},G{P}_{it},ROC{E}_{it},LE{V}_{it},AG{E}_{it},AG{E}_{it},O{C}_{it},{\epsilon }_{it}\right)$$

(4)

$$F{V}_{it}={\beta }_0+{\beta }_{1}E{P}_{it}+{\beta }_{2}S{P}_{it}+{\beta }_{3}G{P}_{it}+{\beta }_{4}ROC{E}_{it}+{\beta }_{5}LE{V}_{it}+{\beta }_{6}AG{E}_{it}+{\beta }_{7}O{C}_{it}+{\epsilon }_{it}$$

(5)

In a similar vein, the subsequent model investigates how technological innovation influences ESG performance and firm value as a moderating factor. Below is a description of the second phase of the research model.

$$\begin{array}{c}F{V}_{it}={\beta }_0+{\beta }_1(E{P}_{it}\times \mathrm{R}\&{\mathrm{D}}_{it})+{\beta }_2(S{P}_{it}\times \mathrm{R}\&{\mathrm{D}}_{it})+{\beta }_3(G{P}_{it}\times \mathrm{R}\&{\mathrm{D}}_{it})+{\beta }_{4}ROC{E}_{it}+{\beta }_{5}LE{V}_{it}+{\beta }_{6}AG{E}_{it}+{\beta }_{7}O{C}_{it}\\ +{\epsilon }_{it}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\end{array}$$

(6)

In this equation, firm value (FV) represents the dependent variable, ${\beta }_0$ symbolizes a constant, $\epsilon$ denotes an error term, i indicates the companies, t depicts the years, and ${\beta }_1$ through ${\beta }_7$ represent the inclination of coefficients for both the independent and control variables. Environmental performance (EP), social performance (SP), and governance performance (GP) are the independent variables in this study. Return on capital employed (ROCE), leverage (LV), firm age (AGE), and ownership concentration (OC) are the independent variables.

3.4. Summary of Study Variables

Abbreviations of variables, their measures, and definitions are provided in

Table 2. A list of the study’s variables.

Categories of Variables	Variables	Symbol	Measurement	Expected Sign
Dependent variable	Firm Value	FV	The average price of the company’s stock over a specified period (a year)
Independent variables	Environmental Performance	EP	Environmental activities reported in the annual reports/total number of environmental items on the disclosure list	+
	Social Performance	SP	Social activities disclosed in the annual reports/total number of social items on the disclosure list	+
	Governance Performance	GP	Governance activities reported in the annual reports/total number of governance items on the disclosure list	+
Moderating	Research and Development	R&D	Percentage of the amount of money invested in research and development in technological innovation or amount used to acquire technology	+
Control variables	Profitability	ROCE	Earnings before tax and interest divided by capital employed	+
	Leverage	LEV	The total debts divided by equity at the end of the year	−
	Firm Age	AGE	Years from the inception of the company until the observation date	−
	Ownership concentration	OC	Shares that the largest shareholder owns as a proportion of all outstanding shares (%)	+

.

3.5. Estimation Technique and Data Processing

The authors first used cross-sectional dependency to determine a relationship between the variables under consideration. The CD test informed the authors to choose the suitable estimation technique. The stationarity analysis was then carried out using the CIPS unit root test to ascertain whether the variables are stationary at level, first difference, or second difference. A cointegration test was run to assess the long-term link between the variables. Based on the preliminary tests, the GMM and PMG estimators were employed. The GMM estimator is resistant to distributional assumptions, and it may be used to correct the endogeneity bias and serial correlation of the study variables [44]. Additionally, when there is endogeneity in the model, the PMG estimator can still provide reliable and unbiased findings, thus improving the effectiveness and dependability of our findings.

4. Results and Discussion

4.1. Friedman Cross-Sectional Dependency Test

In a panel data analysis, cross-sectional dependence is a common issue, where variables within a single cross-section tend to be associated due to underlying, unobserved factors affecting all the variables. This phenomenon, known as a pervasive cross-sectional dependency, can introduce biases and impact the accuracy of estimations [45]. The extent and nature of cross-sectional correlations among the variables play a vital influence in evaluating the presence and magnitude of cross-sectional dependence [32]. Ignoring cross-sectional dependence can lead to imprecise estimations, compromising the reliability of the results. In

Table 3. Friedman test for cross-sectional dependency.

Test	Statistics	p-Value
Friedman (FE)	18.583	0.0036
Friedman (RE)	15.681	0.0084

, the Friedmann CD test is presented as a means to assess the cross-sectional dependence.

The results from Table 3 show probability values of 0.0036 and 0.0084 for the fixed effect and random effect, respectively, demonstrating the presence of cross-sectional dependency in the study parameters. The statistical values were significant at the 1% level for FE and RE. Since the statistical values were significant at 1%, CD exists in the study parameters; therefore, the alternative hypothesis of the presence of CD is accepted and the null hypothesis of no CD in the study variables is rejected. The results imply that any negative externality that will affect one pharmaceutical company in developing and least-developed countries is likely to affect other pharmaceutical companies.

4.2. Stationarity Test

According to [46], another crucial component of research is to determine if the data are stable, which implies they keep their statistical properties across time. In order to employ several time series and panel data approaches, the underlying data must be steady [47]. Unit root testing is crucial to the process because it substantially influences how the time series and panel data evaluation are performed. The researchers examined the stationary nature of the panel data and the integration in order to lessen the use of incorrect estimate approaches [48]. The study’s CIPS unit root test is shown in

Table 4. CIPS unit root test.

Variable	Level		1st Difference
	Constant	Constant and Trend	Constant	Constant and Trend
FV	−2.375	−3.152	−3.84	−4.603
EP	−3.838	−4.173	−4.638	−5.069
SP	−2.812	−3.37	−4.341	−4.819
GP	−1.181	−2.293	−3.348	−3.736
R&D	−2.877	−3.648	−4.331	−5.278
ROCE	−2.96	−3.436	−4.31	−4.864
LEV	−1.842	−2.509	−3.718	−4.862
AGE	−2.61	−3.532	−4.21	−4.97
OC	−2.505	−2.97	−3.095	−4.475

.

Except for GP and LEV, which recorded values less than the critical values of −2.24 for constant and −2.63 for constant with trend, all the study variables were found to be stationary at level according to the findings of the CIPS unit root test. As a result, the first difference test had to be run in order to confirm that all of the coefficients will remain stationary before selecting an appropriate estimator for the empirical investigation. As a result, all of the study variables were validated for the empirical analysis after the first difference test was run. Consequently, we support the alternative hypothesis of stationarity and reject the null hypothesis of stationarity. The findings demonstrate that the variables were stationary at the first difference.

4.3. Cointegration Test

In order to confirm the long-term relationships between the studied variables, the Pedroni cointegration methodology was used in the study. The lack of a cointegration test in the research suggests that the study parameters have no long-term relationship [49,50]; therefore, the cointegration test must be carried out to confirm the long-term relationships between the research parameters.

Table 5. Pedroni cointegration test analysis.

Test	Statistics
Modified Philips–Perron t	7.6582 ***
Phillips–Perron t	−8.5361 ***
Augmented Dickey–Fuller t	−9.4571 ***

*** = 1%.

presents the Pedroni cointegration analysis between the study parameters.

The results from Table 5 show probability values of less than 1%, which indicates that there is a long-term link among the study variables. The Pedroni cointegration trend test revealed values that were statistically significant at 1%, indicating the existence of a long-term relation among the study variables; therefore, we reject the null hypothesis of cointegration and accept the alternative hypothesis of cointegration. This confirms that there is a persistent link between the variables taken into consideration in the integrated evaluation.

4.4. Estimation Techniques

The authors employed the GMM and PMG estimators to prevent the disparities in the regression results caused by utilizing a poor estimate technique. By averaging the instant coefficients for each company, the PMG estimator also produces accurate estimates of the mean of the time coefficients throughout companies (if the cross-sectional measurements are substantial). The PMG estimator is a middle-ground estimator that enforces uniformity for the long-term coefficients across groups whilst allowing short-term parametric variations among pairs. The GMM estimator provides several benefits over the highest probability, including the ability to estimate within theoretically implied bounds without the need for additional distributional assumptions. As a result, the research used the PMG estimator for the robustness estimates and the GMM estimator for the main estimation. The study used stepwise regression by presenting each independent variable in a single model; thus, models 1, 2, and 3 were used for the three independent variables. Moreover, in model 4, all the independent variables were integrated in one regression to identify the effect on firm value.

Table 6. Estimation analysis.

Variables	Model 1		Model 2		Model 3		Model 4
	R1	R2	R1	R2	R1	R2	R1	R2
LNEP	0.0624 ***	0.0387 ***					0.0574 ***	0.0481 ***
LNSP			0.0738 ***	0.0511 **			0.0654 ***	0.0547 **
LNGP					−0.0245	−0.0317 *	−0.0352	−0.0241
LNROCE	0.0627 ***	0.0486 ***	0.0575 ***	0.0588 **	0.0546 *	0.0482 **	0.0675 ***	0.0547 ***
LNLEV	−0.0543 *	−0.0215 **	−0.0451	−0.0182	−0.0674	0.0362	−0.0808	−0.0662
LNAGE	0.1237	0.1013	−0.1636 *	−0.1149 *	−0.2513	−0.1524	0.2699 *	0.2021 *
LNOC	0.0649 **	0.0435 **	0.0869	0.0416	0.0325	0.0142	0.657 **	0.0406 **
Wald chi2	134.27	545.51	124.5	745.51	158.64	478.85	443.24	1423.41
Prob > chi2	0.0000	0.0000	0.0000	0.0000	0.712	0.0000	0.0000	0.0000
Hansen Test	0.512		0.431		0.519		0.593
AR(2)	0.335		0.309		0.411		0.452
Obs.	962	1014	962	1014	962	1014	962	1014

***, **, * for 1%, 5%, and 10%, respectively.

presents the estimation techniques for the study. The research also looked at the moderating effects of technological innovation on ESG performance and business value. The moderating results are presented in

Table 7. Moderating role of technological innovation on ESG performance and firm value.

Variables	Model 1		Model 2		Model 3		Model 4
	R1	R2	R1	R2	R1	R2	R1	R2
LNEP	0.7413 ***	0.5628 ***					0.6246 ***	0.5052 ***
LNSP			0.6052 ***	0.5011 ***			0.7302 *	0.4634 *
LNGP					−0.5995	0.4147 *	0.4884	0.3484
LNROCE	0.7824 **	0.6204 ***	0.5542 **	0.4588 **	0.5690 ***	0.4377 ***	0.7106 ***	0.6341 **
LNLEV	−0.4726 *	−0.3525 **	−0.7418	−0.6192	−0.5246	−0.2752	−0.6385	−0.5542
LNAGE	0.4942 *	0.3367 *	−0.5752	−0.2849	0.6438 **	0.5411 *	0.1738 *	0.3348 *
LNOC	0.5631 *	0.4635 **	0.2851	0.5146	0.4516 **	0.3506 **	0.5099 **	0.6422 **
Wald chi2	133.27	643.25	142.5	563.25	131.24	843.15	686.4	1572.62
Prob > chi2	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000
Hansen Test	0.354		0.391		0.417		0.484
AR (2)	0.521		0.733		0.637		0.586
OBS	962	1014	962	1014	962	1014	962	1014

***, **, *, respectively, for 1%, 5%, and 10%.

.

The findings from Table 7 reveal high values for Wald Chi2, implying that the estimators employed are reliable and appropriate for the empirical examination. Moreover, the statistically significant Prob > chi2 further affirm the model’s fitness for the empirical analysis. In addition, our findings reveal insignificant values of 0.512, 0.431, 0.514, and 0.593 for models 1, 2, 3, and 4, respectively, implying that the GMM model does not suffer from instrument proliferation. In addition, the AR (2) recorded indicates that our model is free from second-order autocorrelation. The statistical values recorded demonstrate the dependability, precision, and efficacy of the findings drawn from the empirical study, which are applicable to pharmaceutical companies in developing and least-developed countries. As a consequence, the method effectively incorporates a larger proportion of the diverse effects that many of the independent characteristics have on the dependent variable. As a result, the estimators used for the empirical investigation accurately reflect analyzing the connection between ESG performance and company value.

The main estimation findings from Table 7 reveal that EP recorded an affirmative relationship with firm value in both models 1 and 3. The positive association indicates that a percentage rise in EP as a business responsibility will lead to a corresponding increase in the stock price of the sampled pharmaceutical companies. The results suggest that the sampled firms should adopt environmentally friendly activities to increase the firm value of their operation.

The social performance revealed a favorable and statistically significant association with firm value. The positive relationship indicates that a 1% increase in social performance will lead to 0.0738 and 0.0654 changes in the stock price of the pharmaceutical companies for models 2 and 4, respectively. The results affirm the need for the sampled companies to increase the performance of social responsibility to raise the firm value.

Contrarily, government performance and firm stock price revealed an adverse and insignificant association. The adverse association indicates that a percentage increase in government performance will correspond to a decline in firm value by 0.0245 in model 3 and 0.0352 in model 4. The findings imply that the government pillar of ESG performance does not influence firm value in developing and least-developed countries.

Regarding the robustness results in R2 of Table 5, EP and SP recorded a favorable and statistically significant link with firm value at the 1% and 5% level for models 1 and 2, respectively. The results imply that an increase in EP and SP of the sampled companies will increase the firm value by 0.0387 and 0.0511, respectively; however, GP revealed an inverse and significant link with firm value in model 3, whereas, in model 4, an adverse and insignificant link was discovered between government performance and firm value.

The PMG robustness findings as shown in R2 for models 1–4 in Table 5 reveal similar findings as the main estimator findings. The results for EP indicate a favorable and significant relationship with firm value at the 1% level. Additionally, SP shows a favorable correlation with firm value. This indicates that a percentage rise in SP will increase the firm value to 0.0547; however, GP and the firm value have a significant negative link in model 3, while in model 4, a negative but insignificant relationship was found.

4.5. Moderating Analysis

The moderating outcomes from Table 7 reveal similar findings as the main estimator in Table 6 except for governance performance. Similar to the main estimation in Table 6, in Table 7, a favorable and significant link was found between the environmental performance and firm value, as well as between the social performance and firm value. Contrarily, in the moderating results, a favorable but insignificant relationship was found between the government performance and firm value in models 3 and 4. Therefore, the findings affirm the need for considering effective research and development investment when implementing environmentally friendly initiatives and the social responsibility performance of the sampled companies. The moderating results suggest that investment in R&D has a greater influence on environmental performance and firm value, as well as social performance and firm value; therefore, the sampled firms should adopt effective R&D investment to promote environmental and social interest. However, government performance revealed a positive and insignificant coefficient. The positive slope implies that integrating research and development investment will increase the influence of GP on the firm value of the sampled companies.

4.6. Discussion

Consistent with the legitimacy theory, environmentally friendly responsibility can enhance firm value and considerably aid in the growth of the company. Therefore, to promote firm value, the theory elaborates that the business should be environmentally friendly and observe ecological norms, values, ethics, and behavior of the environment. This explanation is justified by [36,51], who claim that business financial viability depends on environmental coerciveness and response. Moreover, the stakeholder’s theory emphasizes on the commitment to enhance efficient environmentally friendly responsibility and promote firm value. The stakeholder’s theory suggests that in order to obtain the firm value of pharmaceutical companies in developing and least-developed countries, the companies must increase and report on environmental performance activities and programs in their collective operations. Our results reveal a favorable and statistically significant link between environmental performance and company value. Therefore, the first hypothesis is accepted. Our results suggest that, in fostering sustainable and resilient economic growth, policymakers should prioritize the establishment and enforcement of robust environmental reporting and disclosure standards for companies to increase their sustainability performance, as well as firm value in the long run.

Increasing social performance is aligned with the legitimacy theory, as it encourages the participation of businesses in practicing and observing social norms and ethical conduct when obtaining high firm value. This explanation is justified by [52]. The theory suggests incorporating societal interest with the interest of the business to obtain the firm value. In accordance with the stakeholder’s theory, the corporation must engage societal interest with the interest of the business to enhance business value. Our results reveal a favorable and statistically significant link between social performance and firm value. The results affirm the need for the sampled pharmaceutical companies in developing and least-developed countries to contribute effectively to societal programs and activities to raise the firm value. Moreover, our results suggest that companies must observe societal norms, behavior, and attitude to promote the sustainability agenda. Based on our outcomes, the second hypothesis is embraced. Our result aligns with that of [53], who discovered a favorable link between social performance and firm performance. Therefore, there is a need to ensure that policies regard social disclosures and performance, since this will go in a long way in improving the stock value of the pharmaceutical firms.

To ensure compliance with business responsibilities, government and regulatory agencies play a major role. According to our findings, governance performance was shown to have an inverse connection with firm value. This is because in developing and least-developed countries, government attention is mainly on economic growth, hence, little or no attention is paid to ecological issues [54]. Therefore, regulators are mostly liberal on environmental protection issues. Hence, the third hypothesis is rejected. Our estimation findings are similar to [55], who found that firms with greater governance performance and transparency have lower costs of capital and higher valuations compared to peers with lower performance. Since governance structure does not impart much of an impact on a firm’s value, companies should not focus so much on the governance mechanisms. Instead, much emphasis should be placed on environmental and societal disclosures.

In terms of the moderating role of technological innovation, the study assumed that firms with higher technological innovation are likely to have a stronger incentive to their commitment to ESG practices to external stakeholders. Our estimation results confirm a significant positive connection between the moderating role of environmental performance and firm value, as well as social performance and firm value, hence, we accept our fourth and fifth and fifth hypotheses since the findings were affirmed by our results. Our findings support those of [56], who found that environmental performance benefits from institutional technological innovation and influences a high firm value. This was further backed by [57], who found that technological innovation positively influences the relationship between ESG performance and firm profitability. Our findings suggest that technological advancements can empower companies to implement sustainable practices, optimize resource utilization, and enhance overall efficiency. In the long-term, this will positively influence firm value. Hence, such policies would not only contribute to sustainable economic growth, but also foster social and environmental improvements, ultimately leading to increased firm value in developing and least-developed countries. As such, there is the need for policy guides to prioritize initiatives that encourage and support both environmental and social integration in the business ecosystem.

Conversely, it was discovered that a favorable but insignificant link exists between governance performance and firm value, which is caused by the neutralizing impact of the moderation factor (technological innovation). Our results are similar to those of [58], who discovered an insignificant link between ESG and firm value R&D intensity moderating the relationship. Our findings imply that firms with greater technological innovation can influence government policies in the implementation of a sustainable strategy. Hence, the last hypothesis was rejected.

5. Conclusions and Policy Contributions

Environmental concern has raised interest in the academic cycle, as most stakeholders and the public are now interested in the report of environmental disclosure by companies and organizations. Since the interest of stakeholders and the public is mainly focused on environmental protection and well-being, businesses have to strive to accomplish the interest of these parties when making corrective decisions and policies. The role technological innovation plays in influencing the performance of ESG and firm value, however, it is mostly missing in empirical studies. In this study, we examined the influence of ESG performance on firm value in the pharmaceutical industry of developing and least-developed countries, with a key interest in the moderating role of technological innovation. The study utilized a quantitative approach in analyzing this relationship. Data spanning from 2009 to 2022 were used for the empirical analysis. We employed the GMM and PMG estimators for the empirical analysis. The findings reveal that environmental and social performance influence the firm value; however, governance performance does not influence firms’ value for pharmaceutical companies in developing and least-developed countries. In addition, the link between environmental performance and corporate value is favorably impacted by technological innovation to a large extent, as well as social performance and firm value.

Considering the results, it is recommended that firms should focus on environmental and social responsibility since it has a significant impact on the firm’s stock price. Additionally, governments in developing and least-developed countries should implement policies that require companies to include technological innovation in their production lines since the inclusion of technological innovation, with the government’s performance as a pillar of ESG, has a favorable influence on the firm value.

There are three major policy contributions of this study. First, it expands our understanding of the relationship between ESG performance and firm value in developing and least-developed countries by providing valuable insight into the impact of these variables on the performance and value of businesses. Second, the paper explores how technological innovation, a crucial but underappreciated element, moderates the link between ESG and corporate value. The study provides a foundation for more nuanced strategies for firms by illuminating new elements of the complicated interplay between sustainable practices and firm value by acknowledging the role of technology. This study’s findings have real-world relevance because they will help businesses, policymakers, and investors improve sustainable practices and make ethical investment choices in the ever-changing, emerging market landscape of developing and least-developed countries.

In terms of limitations, this study focused on only domestic pharmaceutical companies in central and southern Africa. Future research should expand the geographical scope beyond central and southern Africa to compare findings with other regions globally. This would provide a more thorough grasp of the connection between ESG performance, firm value, and technological innovation. In addition, increasing the sample size and diversifying the industries studied would enhance the generalizability of the findings. Qualitative interviews and mixed-method approaches can offer deeper insight into the underlying mechanisms at play. Furthermore, conducting longitudinal studies would enable the examination of the long-term effects of ESG performance and technological innovation on firm value.