Short-run and long-run effects of ESG policies on value creation and the cost of equity of firms
Despite the general trend to include ESG scores in the evaluation of firm performance, the effect of ESG policies on the market value of companies is currently a subject of debate. In this paper we propose a dynamic version of Ohlson’s model under timevarying discount rates consistent with the Campbell–Shiller present value identity. This enables differentiation between short term and long term implications of ESG performance on value creation, as well as income and substitution effects. Our results suggest that, although ESG policies imply almost no effects in the short-run, at longer horizons, better ESG performance results in lower value creation, mainly due to substitution effects channeled to market value via higher long-term discount rates. Our results are consistent with ESG strategies implying transitory effects on the cost of equity and the market value, which may result from time-varying investor preferences, long-term reputational penalties, or market misvaluation.
Acknowledgments We would like to acknowledge Christine Brown of Monash University for her valuable comments and helpful suggestions on the manuscript. Funding This work was supported by Programa Operativo FEDER Andalucía 2014–2020 [B-SEJ-740-UGR20].
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