Sustainability and firm valuation: an international investigation

• DOI: https://doi.org/10.1108/IJAIM-07-2014-0050
• Published date: 03 August 2015
• Pages: 289-307
• Date: 03 August 2015
• Author: Minna Yu,Ronald Zhao
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Sustainability and rm valuation:

an international investigation

Minna Yu and Ronald Zhao

Department of Accounting, Monmouth University, West Long Branch,

New Jersey, USA

Abstract

Purpose – This paper aims to examine whether capital market rewards rms with good corporate

sustainability practices in an international setting by using the Dow Jones Sustainability Index (DJSI

hereafter) as an integrated measure of rm sustainability performance.

Design/methodology/approach – There are two alternative theories regarding the impact of

sustainability on rm value. The value-creating theory predicts that integration of environmental and

social responsibility into corporate strategies and practices reduces rm risk and promotes long-term

value creation. The value-destroying theory on sustainability suggests that managers may engage in

socially responsible activities at the expense of shareholders. To perform empirical tests, we use a large

international sample for a period of 13 years between 1999 (the rst year when DJSI became available)

and 2011. To control for self-selection bias and simultaneity, the authors use lagged values of

sustainability performance in a robustness check.

Findings – The authors nd a positive relation between sustainability performance and rm value,

after controlling for variables that have been found to affect rm value in the existing literature. The test

results are consistent with the value enhancing theory (as opposed to the shareholder expense theory)

regarding the role of sustainability engagement in rm valuation. Furthermore, the positive impact of

sustainability engagement on rm value is primarily driven by countries with strong investor

protection and with high disclosure levels.

Research limitations/implications – A positive impact of sustainability performance on rm

value supports the value-creating theory and rejects the value-destroying theory. Test results also

suggest a more pronounced market response to corporate sustainability in countries with stronger

shareholders protection and higher requirement for nancial transparency.

Practical implications – Given the growing international capital market and intensifying global

competition, the valuation implications of sustainability in an international context is of practical

interest to management, investors and regulators worldwide.

Originality/value – First, it is an initial attempt to test an integrated measure of the

“triple-bottom-line” denition of sustainability in an international setting. Second, our paper studies the

international variation in market valuation of rm sustainability performance in terms of the value

enhancing versus shareholder expense theories on sustainability. The authors explore the relevance of

sustainability performance in relation to the investor protection and the reporting environment across

countries.

Keywords Investor protection, Sustainability performance, Dow Jones Sustainability Index (DJSI),

Financial transparency, Firm valuation

Paper type Research paper

1. Introduction

In this paper, we examine whether capital market rewards rms with good corporate

sustainability practices in an international setting by using the Dow Jones

Sustainability Index (DJSI hereafter) as an integrated measure of rm sustainability

The current issue and full text archive of this journal is available on Emerald Insight at:

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Sustainability

and rm

valuation

289

Received 24 July 2014

Revised 3 August 2014

Accepted 4 August 2014

InternationalJournal of

Accountingand Information

Management

Vol.23 No. 3, 2015

pp.289-307

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2014-0050

performance. Sustainability stands as the means of meeting the needs of the present

generation without compromising the ability of future generations to meet their own

needs (World Commission on Environment and Development, 1987). The most widely

accepted denition of sustainability that has emerged over time is the triple-bottom-line

consideration of economic viability, social responsibility and environmental

responsibility. This triple-bottom-line denition considers not only the physical

environment and stewardship of natural resources but also the economic and social

context of doing business, encompassing the business systems, models and behaviors

necessary for long-term value creation.

Sustainability accounting originated over 20 years ago, and is considered a

sub-category of nancial accounting that focused on the disclosure of non-nancial

information about a rm’s performance to various stakeholders. The Global Reporting

Initiative (GRI) issued by the Coalition for Environmental Responsible Economics has

attempted to provide guidelines for such reports. Many large corporations and NGOs,

including the United Nations, use or reference the GRI in their sustainability reports.

These reports have generally been stand-alone reports that have a multi-stakeholder

focus on a broad array of issues. Companies try to project an image of corporate social

responsibility (CSR) by voluntarily supplementing their annual nancial reports with

separate CSR reports. Small or medium enterprises also have developed indicators to

assess their sustainability efforts, as shown in a case study by Clarke-Sather et al. (2011).

Accounting researchers have become increasingly interested in the role that such

disclosures play in rm valuation.

The American Institute of Certied Public Accountants has joined forces along with

other major accounting bodies around the world in a call for the development of a

universally accepted, connected or integrated reporting model. Connected or integrated

reporting is the reporting of both nancial and non-nancial information, including

sustainability information, in an integrated way as contrasted to the current prevailing

practice of issuing separate, stand-alone nancial and sustainability reports. The

development of such a framework has encountered a series of thorny issues, as many of

the negative impacts of organizational operations are externalities, and there are no

accepted ways to measure social and environmental performance. Traditional

accounting methods mishandle natural assets. Current nancial decision tools cannot

easily account for intangible risk or benets. Discounting underestimates the needs of

future generations and long-term impacts.

Investors’ awareness of sustainability as a viable corporate strategy has grown over

years[1]. However, research to date suggests only limited evidence that shareholders

perceive environmental, social and sustainability engagement as important, especially

outside USA[2]. In this paper, we use the DJSI as an integrated measure of rm

sustainability performance. First calculated in 1999, DJSI is composed of global

sustainability leaders as identied by Sustainability Assets Management (SAM)

Indexes GmbH (Germany) through corporate sustainability assessment.

Following a best-in-class approach, the DJSI includes companies across all industries

that outperform their peers in numerous sustainability metrics, based on a Corporate

Sustainability Assessment that provides an in-depth analysis of economic,

environmental and social criteria, such as corporate governance, water-related risks and

stakeholder relations, with a special focus on industry-specic risks and opportunities.

Companies selected to be included in the index are considered to be industry

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