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  • Xin Xu * and
  • Zizhen Liu

Reviewer 1: Anonymous Reviewer 2: Muhammad Kaleem Khan Reviewer 3: Anonymous

Round 1

Reviewer 1 Report

1. Section 3.2.4:

a) wrong explanation of the formula of CAPEX (incoherence with Table 1): ”ratio between a firm's expenditure on fixed assets and equipment and its total operating revenue...". Instead of total operating revenue it should be Total assets

b) wrong explanation of R&D intensity (incoherence with Table 1): Total assets instead of Total operating income 

c) Table 1: review the formulas (in the column Variable Definition) for control variables I.A. and FOR (*100 instead of /100)

2. Section 4.4

a) 3rd paragraph: "As shown in Column (4) of Table 4 ..." - it's actually Table 5

b) "The results are presented in Columns (5) and (6) of Table 6" - actually, Columns (1) and (2)

c) "To enhance the persuasiveness...(ROE, net interest rate divided by net assets)" - review the formula of ROE - it should be Net income divided by Net Assets

3. Section 5.1, 2nd paragraph: PSR instead of CSR

4. Section 5.1, Table 11: wrong name of the table  

Author Response

Response to Reviewer 1 Comments

 

Point 1: wrong explanation of the formula of CAPEX (incoherence with Table 1):” ratio between a firm's expenditure on fixed assets and equipment and its total operating revenue...". Instead of total operating revenue it should be Total assets

 

Response 1: Thank you for your correction. We have replaced “total operating revenue” with “total assets”. The expression for CAPEX is now “…Capital expenditure ratio (CAPEX): The capital expenditure ratio is a measure of the ratio between a firm's total capital expenditure and its total assets…” (see the revision in line 301), and this expression is consistent with Table 1.

 

Point 2: wrong explanation of R&D intensity (incoherence with Table 1): Total assets instead of Total operating income. 

 

Response 2: As you suggested, this should indeed be “total assets”. Thank you very much for your correction. The expression for R&D is now “…R&D intensity (R&D): R&D intensity is a measure of the ratio between the firm’s total R&D expenditure and its total assets…” (see the revision in line 303). After correction, the expression for R&D is consistent with the formula in Table 1.

 

Point 3: Table 1: review the formulas (in the column Variable Definition) for control variables I.A. and FOR (*100 instead of /100).

 

 

Point 4:3rd paragraph: "As shown in Column (4) of Table 4 ..." - it's actually Table 5.

 

Response 4: Thank you very much for your careful correction. We did make a mistake here. We have now changed "Table 4" to "Table 5". The phrase is now expressed as: “…As shown in Column (4) of Table 5…” (see the revision in 450).

 

Point 5: "The results are presented in Columns (5) and (6) of Table 6" - actually, Columns (1) and (2)

 

Response 5: Thank you again for your careful revision. We have changed Columns (5) and (6) to Columns (1) and (2) (see the revision in line 467). The following is our revision:” … The results are presented in Columns (1) and (2) of Table 6…”. In the meantime, we have read through the whole text to avoid similar errors.

 

Point 6: "To enhance the persuasiveness...(ROE, net interest rate divided by net assets)" - review the formula of ROE - it should be Net income divided by Net Assets.

 

Response 6: Thank you for your correction. We have amended the description of ROE as suggested. ROE is now expressed as "net income divided by net assets "(see the revision in line 504).

 

Point 7: Section 5.1, 2nd paragraph: PSR instead of CSR

 

Response 7: Thank you for your careful examination. It really should be “president’s shareholding ratio (PSR)” here. We have made the change as requested (see the revision in 538). At the same time, we read through the whole text to avoid similar errors.

 

Point 8: Section 5.1, Table 11: wrong name of the table.

 

Response 8: Thanks for your careful revision. We have changed the title of the table to “further mechanism test of cultural distance and level of legitimacy” (see the revision in line 687).

 

References:

  1. Wu, Lingyun; Zhao, Yuan Dong. A polynomial trend-autoregressive-conditional heteroskedasticity model for sunspots. Journal of Applied Basic and Engineering Sciences 2003, 241-246(in Chinese).
  2. Yu, P.; Dou, J. X. Digital inclusive finance, firm heterogeneity and innovation in micro, small and medium-sized enterprises. Contemporary Economic Management 2020, 42, 79-87, doi:10.13253/j.cnki.djjgl.2020.12.011(in Chinese).
  3. Niu Peng; Zheng Mingbo; Guo Jiwen How business environment affects corporate investment. Contemporary Finance and Economics 2022, 90-101, doi:10.13676/j.cnki.cn36-1030/f.2022.01.009(in Chinese).

 

Reviewer 2 Report

ID_2295977: Title: ESG, Cultural Distance and Corporate Profitability: Evidence from Chinese Multinationals

 

Dear authors and editor,

 

This article focuses on the moderating role of cultural distance on the ESG-financial performance relationship of Chinese multinational companies. I can see some aspects of the paper that should be improved for its consideration.

 

First of all there are many language related issues starting from the abstract line 14 “….completely moderated”, meaning is not clear. Further, there is repetition of same line which is unnecessary line 16 “…..This research analyses the impact of ESG on corporate profitability from the perspective of cultural distance.” It is already stated twice in abstract, so it is better to delete it.

Abstract is not clear. Especially the way of reporting findings. Further, authors are using abbreviations and full terms confusingly. Environmental, social and governance (ESG).

 

Overall, they paper needs a thorough grammar and language check.

 

 

In the introduction section, first sentence “Environmental, social and responsible (ESG)”, it should be Environmental, social and governance (ESG),

 

Contribution of the study is not clear. Please clarify your research questions, objectives, background motivation, theoretical and empirical motivation and the lines of contributions to the literature. You can do this by sharply articulating your research questions/objectives, identify the potential theoretical, background and theoretical motivation or gaps, and explain how your study contributes to the literature. You can do this by highlighting the weaknesses of prior studies as well. Currently, your introduction is very dry. The description of the contribution needs to be more forensic, needs to be more focussed.

 

Some of the stated contribution are misleading “Second, this study can provide evidence for studying the impact of cultural distance on economic outcomes”. ESG is a social perspective of the organizations or social outcome not economic. Similarly third contribution point also needs rewording. Authors should consult following recent studies on ESG to improve introduction part:

 

ESG, Dividend Payout Policy and Audit Quality: An empirical Evidence from the Western Europe

R. M. Ammar ZAHID, TARAN A*, Khan MK., Ionela-Corina C

Borsa Istanbul Review

https://doi.org/10.1016/j.bir.2022.10.012

 

The role of Audit Quality in ESG-Corporate Financial Performance nexus: empirical evidence from western European companies

R. M. Ammar ZAHID, Khan MK*., Waseem A, Maqsood US

Borsa Istanbul Review

https://doi.org/10.1016/j.bir.2022.08.011

  

The literature review and hypothesis development section is satisfactory; except some misleading claim such as the first two line “For developed countries where the theory of ESG is widely accepted, ESG is becoming an increasingly powerful tool for them to measure overseas companies”. Authors should proofread and rewrite it.

 

The methodology section is well built. Except that the author used only one parameter of measuring the financial performance/profitability i.e. ROA. Authors should use alternative variables of financial performance/profitability such as market based measures Tobin’s Q or market return. For details see following articles:

 

Do Chief Executives matter in Corporate Financial and Social Responsibility performance Nexus? A dynamic Model Analysis of Chinese firms

R. M. Ammar ZAHID, Muzammil Khurshid*, Wajid Khan* 

Frontiers in Psychology.

https://doi.org/10.3389/fpsyg.2022.897444

 

The authors need to link their findings more strongly to the: (i) theory, (ii) empirics, (iii) context of region; and (iv) highlight their economic, academic/research and policy implications. In the discussion of the results please focus on the novel findings and insights vis-à-vis the existing literature.

 

 

The robustness and conclusion section are well explained.

 

Thank you.

Author Response

Response to Reviewer 2 Comments

 

Point 1: First of all, there are many language related issues starting from the abstract line 14 “…completely moderated”, meaning is not clear. Further, there is repetition of same line which is unnecessary line 16 “…This research analyses the impact of ESG on corporate profitability from the perspective of cultural distance.” It is already stated twice in abstract, so it is better to delete it.

 

Response 1: Thank you for your valuable suggestions on our abstract. According to your comment, we found that the previous abstract is really not clear enough. Now, we have not only changed the original content after Line 14 and deleted the original content on Line 16, but have also reworked on the language description of the abstract in accordance with the suggestions you have provided. Meanwhile, we have taken into account the highly valuable references you have provided us[1-3].The revised version is shown below.

 

Abstract: In recent years, the demand for social responsibility arising from sustainable development has led to the gradual formation of a global consensus on the concept of environmental, social and governance (ESG), which has a wide impact on corporate operations. Based on legitimacy theory, this study examines the impact of ESG on corporate profitability. In addition, it explores the effectiveness of cultural distance as a moderator of the relationship between ESG and corporate profitability. Using fixed-effects models and moderated-effects models, this study analyses the panel data of Chinese manufacturing multinationals from 2014 to 2021. The results show that ESG significantly and positively affects corporate profitability and that the impact of ESG on corporate profitability is significantly and positively moderated by cultural distance. The research results are expected to provide meaningful insights into the importance of ESG and the factors to be considered by firms in their cross-border investment decision-making (see the revision from line 8 to 18).

 

Point 2: Further, authors are using abbreviations and full terms confusingly. Environmental, social and governance (ESG).

 

Response 2: Thank you for your careful review and correction. ESG is indeed an abbreviation for environmental, social and governance. We have corrected relevant wordings and checked the full text to avoid similar errors. You can find the results of our revision of “environmental, social and governance (ESG)” (see the revision in line 10).

 

Point 3: Overall, they paper needs a thorough grammar and language check.

 

Response 3: Thank you for your efforts in reviewing our manuscript. We have now completed another round of proofreading of the manuscript and made further grammatical and linguistic corrections to improve the readability of the text.

Point 4: In the introduction section, first sentence “Environmental, social and responsible (ESG)”, it should be Environmental, social and governance (ESG).

Response 4: Thank you again for reviewing our manuscript. We have changed " Environmental, social and responsible (ESG)" to " Environmental, social and governance (ESG)" (see the revision in line 22).

Point 5: Contribution of the study is not clear. Please clarify your research questions, objectives, background motivation, theoretical and empirical motivation and the lines of contributions to the literature. You can do this by sharply articulating your research questions/objectives, identify the potential theoretical, background and theoretical motivation or gaps, and explain how your study contributes to the literature. You can do this by highlighting the weaknesses of prior studies as well. Currently, your introduction is very dry.

Response 5: Thank you for giving us these very enlightening comments. In response to these suggestions, we have made the following changes.

 

Research Questions/Objectives: Thanks for your suggestions. In our introduction, it is mainly the third (lines 37 to 61) and fourth (lines 52 to 71) paragraphs that play the role of giving rise to the questions. Thank you for giving these suggestions and for making us aware that we had focused too much on analyzing the questions in our previous writing but neglected the effort to summarize and conclude them clearly. In order to clarify our research questions and objectives, we have adapted them to the highly valuable references you have provided[3] .

Firstly, we have added " …Therefore, the first research objective of this study is to explore whether the development of ESG enhances corporate profitability.…" (see the revision from line 49 to 51) at the end of the third paragraph of our introduction to clarify our first research objective.

Secondly, to clarify our second research objective, we have added "…To address this issue, the second research objective of this study is to explore the effectiveness of cultural distance as a moderator of the relationship between ESG and corporate profitability…"(see the revision from line 69 to 71) at the end of the fourth paragraph of our introduction.

Finally, to further emphasize our research objectives, we have added "…To explore whether the development of ESG by Chinese multinationals can promote corporate profitability and whether the relationship between ESG and corporate profitability is moderated by cultural distance between the location of the parent company and the host country…" (see the revision from line 72 to 75) at the beginning of the fifth paragraph of our introduction.

We hope that these efforts will make our research questions and objectives clear to you and the readers.

 

Background Motivation: Thank you very much for your suggestions. We have taken your suggestions into account and have chosen to clarify our background motivation by highlighting the weaknesses of the previous study.

First, we have added " …In recent years, some ESG studies have been conducted to examine the impact of developing ESG on financial performance, but their findings are still more controversial. While some studies obtain negative or neutral results, most studies reveal a positive impact..." (see the revision from line 33 to 36) at the end of the second paragraph of our introduction to demonstrate the controversies and shortcomings of the existing research, and cited three references to support this view [5-7].

Second, we have added " …The moderating role of other factors has been considered in previous ESG studies, but these existing moderating variables examined are limited to internal factors such as Chief Executives, gender diversity of the broad and ownership structure, or to moderating factors including audit quality, which are to some extent affected internally, while the influence of factors external to the firm are ignored. Unlike external factors such as policy changes, population movements and legal environments, cultural distance arising from differences in language, customs and values is stable, persistent and difficult to reconcile. Especially in multinational operations, cultural distance has a more significant impact, and a large cultural distance between the parent company and the host country would result in a hindrance to business operations..." (see the revision from line 52 to 61) at the beginning of the fourth paragraph of our introduction to briefly describe the choice of moderators in existing studies.

This statement not only demonstrates the shortcomings of current studies in terms of the choice of moderators, but also follows on nicely from the following, which leads to the research objective to "…to explore the effectiveness of cultural distance as a moderator of the relationship between ESG and corporate profitability…" (see the revision from line 70 to 71).However, seven references have been cited to support our view[1 ,2 ,3 ,4 ,8 ,9 , 10].

 

theoretical and empirical motivation: Thank you for your valuable advice. As you suggested, we have added our theoretical motivations in many parts of the text, such as” …Chinese companies often experience social responsibility crises such as employee rights crisis, anti-corruption crises and business ethics crises in their outward foreign direct investment, and thus suffer great difficulties in gaining legitimacy overseas. In addition, low legitimacy damages their corporate image and reputation, threatening their survival and profitability. Hence, it is of great practical importance to explore whether ESG can enhance corporate profitability by strengthening their legitimacy overseas.…” (see the revision from line 41 to 47); “…establishing subsidiaries in a host country that has a large cultural distance affects the effectiveness of corporate decision-making, raises transaction costs and increases trade frictions for multinationals, and exposes firms to more legitimacy risks…” (see the revision from line 63 to 66) and  “…in multinational operations, legitimacy is a pressing issue for companies, hinting at the necessity to study this issue based on the theory of legitimacy..” (see the revision from line 103 to 105).

These descriptions illustrate our motivations for choosing legitimacy theory as the basis of our theory, for which we provided five supporting references[6-10]. In addition, we provide a detailed empirical explanation of the reasons for choosing legitimacy theory in the mechanism test section of the manuscript (Section 5).

We appreciate your pointing out the shortcomings in our empirical motivations, and to remedy this, we have first used the expression " …While the fixed-effects model can exclude the interference of influences that are universally applicable to all samples from the estimation results, the moderated-effects model is able to visibly observe the interactive effect of cultural distance on the relationship between ESG and corporate profitability… " (see the revision from line 76 to 80) to explain our reasons for using the fixed-effects model and the moderated-effects model. And we have outlined in detail the methodology we used in our further tests with the statement " … to further validate the findings, the results of which demonstrate that the effect of ESG on corporate profitability is always significant and that there is heterogeneity in the effect of ESG on corporate profitability at the level of cultural distance. However, we conduct robustness test using sub-year sub-sample regression, expanded sample regression and replacement variables, and endogeneity test using lagged explanatory variables, instrumental variables and double-differencing..." (see the revision from line 83 to 88). Similar research approaches are used in many extant studies [3,11].

 

The lines of contributions: Thank you for your effort in reviewing our contributions. We describe in detail in point 6 the corrections we have made in terms of the contributions of our study.

 

Point 6: The description of the contribution needs to be more forensic, needs to be more focused. Some of the stated contributions are misleading “Second, this study can provide evidence for studying the impact of cultural distance on economic outcomes”. ESG is a social perspective of the organizations or social outcome not economic. Similarly, third contribution point also needs rewording.

Response 6: Thank you for your suggestions and we have followed your advices in revising the contribution of the study. There are the following main changes:

     Firstly, in response to your suggestion regarding the expression "this study can provide evidence for studying the impact of cultural distance on economic outcomes. ", we have amended this description by adding "…Thirdly, this study departs from the mainstream research on ESG in which moderating factors are considered from outside the firm, and more acutely captures the impact of cultural differences between the home and host countries on the likelihood of ESG enhancing corporate profitability. In contrast to previous articles which represent cultural differences only from the perspective of individual cultural characteristics, this paper takes into account the six cultural dimensions of the Hofstede Index rather than a single dimension to measure cultural distance and reflect cultural differences between two countries. The moderating role of cultural distance has been examined in other cross-country domains such as global supply chain, corporate performance and cross-border acquisition, revealing the need to consider the role of cultural distance when identifying economic returns. According to the summarized research findings on the relationship between ESG and profitability, many scholars also call for the inclusion of the moderating role of factors such as cultural distance into the study of ESG and profitability. This paper demonstrates through empirical research that cultural distance does affect the relationship between ESG and corporate profitability, providing managers with new decision-making ideas for the development of ESG.…"(see the revision from line 105 to 120).

In our revised description, we emphasize that we have considered moderating factors "from outside the firm… " and identify "the impact of cultural differences between the home and host countries on the likelihood of ESG enhancing firm profitability." In considering differences between the home and host cultures, rather than only represent "cultural differences from the perspective of individual culture characteristics" as in existing studies, we integrate "the six cultural dimensions of the Hofstede Index rather than a single dimension to measure cultural distance". And this contribution will also answer the calls of others[10-11].

Secondly, thank you for pointing out that "Similarly third contribution point also needs rewording." As you suggested, after careful deliberation we found the original third point of our contributions to be somewhat dull. Fortunately, we have other very interesting contributions from our research. We have therefore removed the original third contribution and added the special and valuable contribution as " …Firstly, this study uses legitimacy theory as a theoretical basis to conduct an exhaustive mechanism test. In previous ESG-related researches, many scholars have chosen to use legitimacy theory as a theoretical support, but their explanation of reasons for the choice of this theory is mostly confined to the theoretical level. This paper not only argues for the application of legitimacy theory in theoretical analysis, but also carries out detailed empirical tests..."(see our revision from lines 92 to 97). This statement not only justifies theoretically the use of legitimacy theory in the ESG field, but further demonstrates this fact through detailed empirical evidence.

Finally, thank you very much for your suggestion that "The description of the contribution needs to be more forensic, needs to be more focused". We have drawn on additional references in summarizing the contributions of this study[10-16]. Thanks for your support in giving these very meaningful references which enabled us to successfully complete the addition and refinement of the contributions.

 

Point 7: The literature review and hypothesis development section is satisfactory; except some misleading claim such as the first two line “For developed countries where the theory of ESG is widely accepted, ESG is becoming an increasingly powerful tool for them to measure overseas companies”. Authors should proofread and rewrite it.

 

Response 7: Thank you for your positive comments on the sections of "literature review" and "hypothesis development" and for pointing out the problems in "misleading claim such as the first two lines". We have changed this sentence to” …ESG theory originally originated in developed countries and has been applied in many areas in developed countries. However, ESG theory has not been widely recognized and applied in many developing country companies due to various constraints such as low economic strength, so that ESG does not play a full role in the international market.…” (see the revision from line 131 to 135). This change is not only supported by many valuable references[14-16], but also allows a smooth connection to the following part.

 

Point 8: The methodology section is well built. Except that the author used only one parameter of measuring the financial performance/profitability i.e., ROA. Authors should use alternative variables of financial performance/profitability such as market-based measures Tobin’s Q or market return.

Response 8: Thank you very much for your positive comments about " The methodology section ". At the same time, we have been inspired by you to read a lot of references[17-19] .Combining the findings from these references with our actual situation, we have not only added "return on invested capital (ROIC)" as an alternative variable for corporate profitability, but also "earnings before interest and tax (EBIT) " as an additional alternative variable, and the empirical results are reflected in the Robustness test section (section4.5; columns (5) and (6) of Table7).

Now, the three alternative variables for corporate profitability interacting with ESG are expressed as follows:” …Thirdly, the explained variable is replaced. In order to enhance the persuasiveness of the research findings, three indicators are used to replace the explained variable ROA in this study, with reference to the research methodology adopted in existing studies. The first indicator is return on net assets (ROE, net income divided by net assets). ROE reflects the profits generated from the use of assets by a firm and can measure the effective use of assets by a firm. Besides, ROE is also an effective measure of profitability as it takes into account shareholders' equity and profits. The second indicator is return on invested capital (ROIC, (Net profit + finance costs) / (Total assets - current liabilities + notes payable + short-term borrowings + non-current liabilities due within one year)), which reflects the firm’s corporate profitability by taking into account its overall capital structure and the extent to which it efficiently utilizes its capital. The third indicator is earnings before interest and tax (EBIT, Net profit + income tax expense + finance costs), which gives a direct reflection of the revenues and expenses earned from the sales of goods or services and therefore reflects the firm’s core profitability. As shown in Columns (4), (5) and (6), the regression results are highly consistent with the results of baseline regressions, all demonstrating that ESG significantly and positively affects corporate profitability at the 1% level....” (See the revision from line 500 to 516).

We hope that these indicators will be sufficient to support our findings.

Table 7. Robustness test regression results.

Variables

(1)

（2）

(3)

（4）

（5）

（6）

ROA

ROA

ROA

ROE

ROIC

EBIT

2014-2019

2020-2021

 

 

 

 

ESG

0.2544***

(0.0414)

0.3313***

(0.0634)

0.5176***

(0.0320)

0.4894***

(0.0658)

0.3923***

(0.1014)

0.3923***

(0.1014)

Year FE

YES

YES

YES

YES

YES

YES

Region FE

YES

YES

YES

YES

YES

YES

CV

YES

YES

YES

YES

YES

YES

_cons

-0.9969***

(0.0799)

-0.9986***

(0.0746)

-1.4055***

(0.0602)

-1.8128***

(0.1265)

-1.1332***

(0.1948)

-1.1332***

(0.1948)

N

2223

999

16681

3229

3229

3229

adj. R2

0.3467

0.3446

0.0656

0.2324

0.0729

0.0729

Note: Columns (1) and (2) of this table show the results of the interaction between ESG and corporate profitability (ROA) in 2014-2019 and 2020-2021 respectively, Column (3) shows the results of the interaction between ESG and corporate profitability (ROA) for all manufacturing companies in China, Column (4),(5) and (6) shows the results of the interaction between ESG and the substitute variable for corporate profitability. Standard errors are in parentheses.* p < 0.1, ** p < 0.05, *** p < 0.01

 

Point 9: The authors need to link their findings more strongly to the: (i) theory, (ii) empirics, (iii) context of region; and (iv) highlight their economic, academic/research and policy implications.

 

Response 9: Thank you very much for your suggestions. In order to link our findings more closely to the theory, empirics, context of region and policy implications, we have carefully reconsidered our conclusions and made the following changes:

“…With the increasing globalization of society, the concept of ESG has also penetrated from corporate governance to national economic and social governance and even to global governance. Meanwhile, the building of ESG discourse capacity has now received extensive attention from the international community. In China, with the introduction, dissemination, implementation and pursuit of ‘innovation, coordination, green, openness and sharing’, ESG has also gradually received more attention from the government, financial institutions and investors.…” (see the revision from line 696 to 702)

“…Based on legitimacy theory and a sample of 3,229 Chinese manufacturing multinationals, this study uses fixed- and moderated-effects models to draw two main conclusions…” (see the revision from line 709 to 711)

“…In addition, based on our research findings, we offer some recommendations with regard to whether and how to develop ESG. Firstly, the positive contribution of ESG to corporate profitability suggests that developing ESG is one of the channels through which companies can make more profits. Therefore, it is important to raise companies' awareness of participation in ESG practices and investors' awareness of ESG investments. The government should encourage companies to substantially engage in ESG practices, so that they no longer see ESG to obtain a 'green label' at an additional cost, but rather as an informative tool to promote their long-term green development and steadily improve corporate profitability. Secondly, as cultural distance positively affects the relationship between ESG and corporate profitability, multinational companies should be more proactive in developing ESG to ensure their corporate profitability when setting up subsidiaries in a host country with a greater cultural distance from their home country. The government can further improve the relevant incentive mechanism and ensure stable corporate development by giving more ESG incentives to multinational enterprises that make outbound investments in a host country with a greater cultural distance…” (see the revision from line 760 to 775).

 

Point 10: In the discussion of the results please focus on the novel findings and insights vis-à-vis the existing literature.

 

Response 10: Thank you for reading our manuscript carefully. We have reworked on our conclusion section and compared it with the existing literature to highlight our findings. This is reflected in” …However, contrary to the finding in existing articles that good environmental performance significantly affects corporate performance, we find that Environmental performance has no impact on corporate profitability, mainly because China has achieved significant results in environmental management in recent years...” (see the revision from line 713 to 717). and "… Therefore, this study deviates from the mainstream research on ESG by shifting the focus from "how companies develop ESG" to "the impact of ESG development on corporate profitability". Unlike Vastola who only examines cultural gaps from individual cultural characteristics, this paper integrates the six cultural dimensions of the Hofstede Index to measure cultural distance, thus more acutely capturing the impact of cultural gaps between the home and host countries on the way ESG enhances corporate profitability…"(see the revision from line 724 to 730). What’s more, many references are provided to support our novel findings in this section of the revision [5,12,19].

 

Point 11: The robustness and conclusion section are well explained.

 

Response 11: Thank you for your positive comments about our " robustness section " and " conclusion section", we will continue to work hard.

 

References:

  1. Zahid, R.M.A.; Khurshid, M.; Khan, W. Do Chief Executives Matter in Corporate Financial and Social Responsibility Performance Nexus? A Dynamic Model Analysis of Chinese Firms. Front. Psychol. 2022, 13, 897444, doi:10.3389/fpsyg.2022.897444.
  2. Zahid, R.M.A.; Khan, M.K.; Anwar, W.; Maqsood, U.S. The Role of Audit Quality in the ESG-Corporate Financial Performance Nexus: Empirical Evidence from Western European Companies. Borsa Istanbul Review 2022, 22, S200–S212, doi:https://doi.org/10.1016/j.bir.2022.08.011.
  3. Zahid, R.M.A.; Taran, A.; Khan, M.K.; Chersan, I.-C. ESG, Dividend Payout Policy and the Moderating Role of Audit Quality: Empirical Evidence from Western Europe. Borsa Istanbul Review 2023, 23, 350–367, doi:https://doi.org/10.1016/j.bir.2022.10.012.
  4. Gholami, A.; Sands, J.; Rahman, H.U. Environmental, Social and Governance Disclosure and Value Generation: Is the Financial Industry Different? SUSTAINABILITY 2022, 14, doi:10.3390/su14052647.
  5. Hart, S.L.; Ahuja, G. ‘Does It Pay to Be Green? An Empirical Examination of the Relationship Between Emission Reduction and Firm Performance.’ Business Strategy and the  Environment, doi:5(1), 30–37.
  6. De Beule, F.; Elia, S.; Garcia-Bernardo, J.; Heemskerk, E.M.; Jaklic, A.; Takes, F.W.; Zdziarski, M. Proximity at a Distance: The Relationship between Foreign Subsidiary Co-Location and MNC Headquarters Board Interlock Formation. INTERNATIONAL BUSINESS REVIEW 2022, 31, doi:10.1016/j.ibusrev.2021.101971.
  7. Gao, Y.; Yang, H. Does Ownership Matter? Firm Ownership and Corporate Illegality in China. JOURNAL OF BUSINESS ETHICS 2021, 168, 431–445, doi:10.1007/s10551-019-04264-y.
  8. Wu, Q.; Chen, G.; Han, J.; Wu, L. Does Corporate ESG Performance Improve Export Intensity? Evidence from Chinese Listed Firms. SUSTAINABILITY 2022, 14, doi:10.3390/su142012981.
  9. La Torre, M.; Leo, S.; Panetta, I.C. Banks and Environmental, Social and Governance Drivers: Follow the Market or the Authorities? CORPORATE SOCIAL RESPONSIBILITY AND ENVIRONMENTAL MANAGEMENT 2021, 28, 1620–1634, doi:10.1002/csr.2132.
  10. Sun, J.; Yoo, S.; Park, J.; Hayati, B. Indulgence versus Restraint: The Moderating Role of Cultural Differences on the Relationship between Corporate Social Performance and Corporate Financial Performance. Journal of Global Marketing 2019, 32, 83–92, doi:10.1080/08911762.2018.1464236.
  11. Grewatsch, S.; Kleindienst, I. When Does It Pay to Be Good? Moderators and Mediators in the Corporate Sustainability-Corporate Financial Performance Relationship: A Critical Review. JOURNAL OF BUSINESS ETHICS 2017, 145, 383–416, doi:10.1007/s10551-015-2852-5.
  12. Vastola, V.; Russo, A.; Vurro, C. Dealing with Cultural Differences in Environmental Management: Exploring the CEP-CFP Relationship. ECOLOGICAL ECONOMICS 2017, 134, 267–275, doi:10.1016/j.ecolecon.2016.11.006.
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Reviewer 3 Report

Dear Authors, 

first of all let me praise you for your intriguing article. It is interesting and well placed in the most recent academic literature background.
Some minor concerns exist:

1) I feel some important contributions in the CSP-CFP lack, moving from Hart and Ahuja and so on.

2) The research contribution is clearly described, but it is not different from other studies and even some references you mentioned (e.g. Vastola et al.). The geographical setting of the analysis is not a contribution itself, so I think the novelty must be reinforced. 

3) After reading your manuscript it is not fully clear what is the operationalization of the moderator variable. 

I think these changes need to be implemented in your article, which is, however, very precise and well written, easy to read and interesting. 

Good luck as you keep on working on it. 

Best regards 

Author Response

Response to Reviewer3 Comments

 

Point 1: I feel some important contributions in the CSP-CFP lack, moving from Hart and Ahuja and so on.

 

Response 1: Thank you for your valuable suggestions. In order to discuss and probe deeper into the research on CSP-CFP, we have cited a number of important and similar references to support our study [1-9]. Their findings have been used to support many of our discussions, such as” …In recent years, some ESG studies have been conducted to examine the impact of developing ESG on financial performance, but their findings are still more controversial. While some studies obtain negative or neutral results, most studies reveal a positive impact...” (see the revision from line 33 to 36), “…Adopting ESG promotes the relationships with governmental departments, banks and investors and allows for gaining trust and support from government regulators, easing resource constraints on companies when coping with uncertainty, and thus reducing corporate risks…” (see the revision from line 163 to 167). and “… we find that Environmental performance has no impact on corporate profitability, mainly because China has achieved significant results in environmental management in recent years… “(see the revision from line 715 to 717).

 

Point 2: The research contribution is clearly described, but it is not different from other studies and even some references you mentioned (e.g. Vastola et al.). The geographical setting of the analysis is not a contribution itself, so I think the novelty must be reinforced.

 

Response 2: Thank you very much for your comments, which have helped us identify aspects that really need to be changed in this section. With regard to your comment on the shortcomings of the third contribution of our study, we have re-read relevant references (especially the important references you have provided us) and have revised our third contribution as: "… Thirdly, this study departs from the mainstream research on ESG in which moderating factors are considered from outside the firm, and more acutely captures the impact of cultural differences between the home and host countries on the likelihood of ESG enhancing corporate profitability. In contrast to previous articles which represent cultural differences only from the perspective of individual cultural characteristics, this paper takes into account the six cultural dimensions of the Hofstede Index rather than a single dimension to measure cultural distance and reflect cultural differences between two countries. The moderating role of cultural distance has been examined in other cross-country domains such as global supply chain, corporate performance and cross-border acquisition, revealing the need to consider the role of cultural distance when identifying economic returns. According to the summarized research findings on the relationship between ESG and profitability, many scholars also call for the inclusion of the moderating role of factors such as cultural distance into the study of ESG and profitability. This paper demonstrates through empirical research that cultural distance does affect the relationship between ESG and corporate profitability, providing managers with new decision-making ideas for the development of ESG…” (see the revision from line 105 to 120).

   Much of the references provides support for our view[10-14]. In addition to the references you have provided us, we have considered the six cultural dimensions of the Hofstede Index together and measured cultural distance when examining the impact of cultural differences. In contrast, Vastola considers only each of the three dimensions including “uncertainty avoidance, masculinity, and long-term orientation”, thus inevitably failing to provide a comprehensive picture of cultural differences. Compared to previous studies, our study is able to capture the impact of cultural differences between the home and host countries on the relationship between ESG and corporate profitability in a more comprehensive and sensitive way.

   In addition to the contributions described in our previous manuscript, we have found another unique and valuable contribution of our research: " …Firstly, this study uses legitimacy theory as a theoretical basis to conduct an exhaustive mechanism test. In previous ESG-related researches, many scholars have chosen to use legitimacy theory as a theoretical support, but their explanation of reasons for the choice of this theory is mostly confined to the theoretical level. This paper not only argues for the application of legitimacy theory in theoretical analysis, but also carries out detailed empirical tests… "(see the revision from line 92 to 97).

   Thank you again for your comments, which have allowed us to make much fuller and more novel description of the contributions.

 

Point 3: After reading your manuscript it is not fully clear what is the operationalization of the moderator variable.

 

Response 3: Thank you for your comments and we are very sorry that we did not describe the operationalization of the moderating variable clearly in the text.

In fact, we used a moderated-effects model in two parts of the study. The first is the application of this moderated-effects model in the study of the moderating effect of cultural distance on the relationship between ESG and corporate profitability (Section 4.3). The coefficient of the cross product of ESG and cultural distance (ESG x CD) reflects the moderating effect of cultural distance on the relationship between ESG and corporate profitability (see Table 4). To validate the moderating effect of cultural distance, we further conducted heterogeneity test and found that the effect of ESG on corporate profitability is heterogeneous at the level of cultural distance (see Table 4).

Second, we also applied a moderated-effects model in the mechanism test section (Section 5.2). While in Section 5.2 we have verified that legitimacy deficit is affected by cultural distance, to further verify the accuracy of the result, we have further explored whether this result is altered by other factors and selected GDP and institutional distance of the host country as moderating variables. In this section, to prevent non-essential multicollinearity, we have centralized cultural distance (CD), GDP of the host country (GDP) and institutional distance (ID1, ID2). The coefficients of the cross-product of GDP of the host country (GDP) and cultural distance (CD) (GDP × CD) reflect the moderating effect of GDP of the host country on the relationship between cultural distance and legitimacy deficit, and the cross-product of institutional distance (ID1, ID2) and cultural distance (CD) (ID1 × CD, ID2 × CD) reflect the moderating effect of institutional distance on the relationship between cultural distance and legitimacy deficit. It has been verified that although these two factors affect the relationship between cultural distance and legitimacy deficit, they still do not change the positive effect of cultural distance on legitimacy deficit (see Table 11).

   In order to make it more understandable to you and our readers, we have revised our manuscript and added detailed explanation to the text. The changes are as follows:

“…In order to reduce the effect of non-essential multicollinearity on the results, the variables involved in the moderating effect are first pooled in this study and then multiplied to obtain their interaction terms…” (see the revision from line 330 to 332).

“…In this study, on a fixed-year and region basis, the variables involved in the moderating effect are first centralized and then multiplied to obtain their interaction terms…” (see the revision from line 339 to 401).

“…Two parts are included to verify that corporate legitimacy can be affected by cultural distance. In the first part, we use the fixed-effects model approach for prime verification. In the second part, GDP and institutional distance of the host country are selected in this study as the moderating variables to explore whether the relationship between cultural distance and legitimacy is affected by other factors…” (see the revision from line 612 to 616).

“…This section further demonstrates through a moderated-effects model that while GDP and institutional distance of the host country have an impact on the relationship between cultural distance and legitimacy, they do not change the positive relationship between cultural distance and legitimacy deficit, and that the need to reduce the negative impact of cultural distance on legitimacy becomes more pressing when the host country has higher GDP and lower institutional distance…”(see the revision from line 676 to 681).

Thank you again for your perceptive identification of our shortcomings and we hope that our revisions will make this article even better.

 

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Round 2

Reviewer 2 Report

The manuscript has been significantly improved. I appreciate the effort of the authors in incorporating the suggested changes.