ESG and Firm Value under Economic Hardship ：Evidence from Sales Decline and the COVID－19 Pandemic

[Purpose] This study examines the effect of environmental, social, and governance (ESG) performance on corporate value in the face of economic difficulties. If a company’s survival is at stake, we predict that the capital market will focus on increasing the viability of a firm more important than the long－term benefits of ESG engagements. [Methodology] We use sales decline as a proxy for economic hardship. A firm’s sales decline is measured in a variety of ways：relative to the firm’s own sales in the preceding year or relative to the change in aggregate sales of the industry in the concurrent year. Additionally, we use operating profit decline as an alternative indicator of economic hardship. We collect ESG performance (ratings) data from Korea Corporate Governance System (KCGS) from 2011 to 2020. [Findings] We find that the positive value effect of ESG performance is weaker for firms that experience such shocks. Furthermore, during the COVID－19 pandemic, the effect of enhancing the value of ESG performance is not observed. Our results are robust to controlling for potential endogeneity of ESG performance using the two－stage least squares (2SLS) approach. [Implications] Our findings suggest that the beneficial effects of ESG performance on long －term corporate value is attenuated when firms face economic difficulties and severe economic crisis.