Sustainability reporting and corporate financial performance: Moderating effect of financial slack resource

Abstract

Considering the growth of sustainability reporting practices over the recent years in South Africa, we investigated the relationship between sustainability reporting and financial performance of South African listed firms. We also investigated the moderating effect of financial slack resource (FSR) on the link between sustainability reporting and financial performance. A 10-year panel data of 110 firms were sourced from the Refinitiv Eikon database. We applied Feasible Generalised Least Squares (FGLS) regression and Correlated Panels Corrected Standard Errors (PCSE) regression (as robustness check) on balanced panel data and found a significant negative relationship between sustainability reporting and return on asset (ROA). We also found that the relationship between sustainability reporting and Tobin's Q was positive but insignificant. Moreover, while a high level of financial slack resource has a significant positive moderating effect on the relationship between sustainability reporting and financial performance, a low level of it has a negative moderating effect on this relationship. The negative association between sustainability reporting and financial performance may be explained that the firms have not been able to strategically execute their sustainability initiatives to the levels required to get the expected benefits.