Economic Freedom and Environmental, Social, Governance Practices: An Analysis of the Financial Sector in the Americas

Abstract

Through the theory of legitimacy and the theoretical perspective of New Institutional Economics, the purpose of this paper is to analyze the effect of economic freedom over the relationship between Environmental, Social, Governance (ESG) practices and profitability. The sample was finance companies located in the Americas, between 2017 and 2020, using the Refinitiv Eikon® database. The analysis used data modeling in a hierarchical panel. Results demonstrate that ESG practices have a positive and significant impact on profitability. Individually, only the social variable showed a positive and significant relationship over profitability. As for the moderating effect of economic freedom, it was shown that economic freedom enhances the relationship between an ESG index and profitability, and only enhances the relationship between corporate governance and profitability when analyzed individually. Furthermore, findings imply that a country’s institutional quality has an important influence on ESG practices and profitability.

A Liberdade Econômica modera a relação entre o Desempenho Econômico e a Estrutura de Capital?

“…Thus, these authors conclude that improving a country's institutional environment will increase companies' access to long-term financing, promoting the countries' economic growth. Ferreira and Malanski (2023) show that Economic Freedom enhances the relationship between Environmental, Social, and Governance practices and the profitability of financial institutions in the Americas. Thus, these authors suggest that the institutional quality of a country has an important influence on corporate decisions.…”

“…Similarly, Kayo and Famá (2004) justify that companies tend to take on less debt when there are good growth opportunities. As Economic Freedom is also an indicator associated with business opportunities, companies located in more economically free countries are believed to have less dependence on external capital (Ferreira & Malanski, 2023).…”

“…The relationship between company performance and CS is one of the finance topics that has absorbed the most research efforts. Furthermore, it is highlighted that, in addition to the determining power of performance over CS, the literature recognizes that a stronger institutional quality facilitates companies' access to debt (Çam & Özer, 2021), and that the degree of Economic Freedom of institutions is capable of influencing the financing decisions of their organizations (Rihab, 2012;Ferreira & Malanski, 2023).…”