Testing the institutional difference hypothesis: A study about environmental, social, governance, and financial performance

Abstract

Considering the institutional, cultural, and regulatory differences across countries, this research investigates the association between environmental, social, and governance (ESG) performance and financial performance of companies from emerging and developed countries. The institutional difference hypothesis (IDH) suggests that institutional weaknesses in emerging markets affect the relationship between financial performance and corporate social performance (CSP) of companies. This can occur because, under such circumstances, firms are more likely to prioritize the capital accumulation and not recognize the potential strategic benefit of socially responsible investments. To investigate this hypothesis, we performed a regression analysis of panel data study comprising 2,165 companies from developed and emerging countries, covering the period between 2007 and 2014. Our results suggest that there is a prevalence of the institutional environment in relation to the financial and ESG performances of companies. These results are in line with the logic of the IDH.

Corporate sustainability strategies in institutional adversity: Antecedent, outcome, and contingency effects

“…Specifically, the study contributes to the corporate sustainability literature in three ways. First, we extend previous studies on the institutional drivers of corporate sustainability strategies by showing that managerial ties with governmental officials, regulatory officials, top managers at other firms, and local community leaders feed into corporate proactive and responsive sustainability strategies of emerging market firms (Boso et al, 2017; Gao et al, 2019; Garcia & Orsato, 2020; Melissen et al, 2018). These institutional entities determine the structure and nature of commercial and economic exchanges in emerging markets (Peng & Luo, 2000; Xu et al, 2012), and we show that top‐level managers' relationships with key institutional actors substitute for the underdeveloped market systems in such markets by providing the local market intelligence and information needed to underscore corporate proactive and responsive sustainability strategies (Chen, Liu, Wei, & Gu, 2018; Park, 2018).…”

“…Following tenets of the institutional development logic, our findings show that, due to the low level of institutional development in emerging markets, firms engage in both corporate proactive and responsive sustainability strategies. These results add to the limited prior research (e.g., Boso et al, 2017; Garcia & Orsato, 2020; Zou et al, 2019) on institutional drivers of corporate sustainability initiatives in emerging markets.…”

“…Such logic alludes to the rigor of market systems in an environmental context (Shinkle & McCann, 2014). Hence, the level of institutional development varies across country environments (Chari & Banalieva, 2015; Garcia & Orsato, 2020). For instance, Kafouros and Aliyev (2016) argue that levels of institutional development in developed economies exceed those of emerging economies, because economic activities in the former are driven by well‐developed market forces and systems (see also Li et al, 2018).…”

“…Still, the link between corporate sustainability strategies and performance is a matter of ongoing debate (Carballo‐Penela & Castromán‐Diz, 2015; Gao, Gu, & Liu, 2019; Park, 2018), as empirical studies (see Table 1) have unveiled positive (Tang, Walsh, Lerner, Fitza, & Li, 2018; Xie, Nozawa, Yagi, Fujii, & Managi, 2019), negative (Das, 2018), and U‐shaped (Trumpp & Guenther, 2017) findings. An inspection of the literature also suggests that sustainability strategies have been framed—in terms of drivers, nature, and outcomes (Garcia & Orsato, 2020; Melissen, Mzembe, Idemudia, & Novakovic, 2018)—as a Western, developed market phenomenon (Li et al, 2018). There is a dearth of work on the sustainability phenomenon in emerging markets, and as such, its performance relevance is potentially ambiguous in such settings (Honig & Acquaah, 2016; Park, 2018).…”

Banks' business strategy and environmental effectiveness: The monitoring role of the board of directors and the managerial incentives

“…Over the past decades, plenty of empirical studies have been conducted on the relationship between social and EP against FP (Bassetti et al, 2020;Duque-Grisales & Aguilera-Caracuel, 2019;Duque-Grisales et al, 2020;Garcia & Orsato, 2020;Minutolo et al, 2019;Qureshi et al, 2020;Xie et al, 2019). Several studies have proved the existence of a positive relationship between corporate environmental performance (CEP) and corporate financial performance (CFP) (Albertini, 2013;Dixon-Fowler et al, 2013 Orlitzky et al, 2003;Raut et al, 2017).…”