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.