Understanding the Impact of External and Internal ESG Actions on Firm Value: The Moderating Role of Customer Awareness

Purpose: The purpose of this study is to explore the relationships between firm’s ESG actions (both external and internal actions) and corporate financial performance (CFP), and examine customer awareness as a moderating factor in these relationships. Design/methodology/approach: The sample of this study includes 3,479 (firm-year) observations from 455 publicly traded U.S. manufacturing firms between 2003 and 2018. Utilizing data from ASSET4 ESG ratings, the Compustat, and the Execucomp databases for S&P 500 companies, we employ panel OLS regression analyses to test our hypotheses. Findings: We find a positive relationship between external ESG actions and firm value, and that internal ESG actions alone may not enhance firm value. We also find that customer awareness positively moderates both the relationship between external ESG actions and firm value, and the relationship between internal ESG actions and firm value. Research limitations/implications: This study extends the CSR-CFP relationship literature by discovering external actions of ESG influence firm value while internal ESG actions can be beneficial only when the focal firms are visible to a larger number of stakeholders. Our study suggests that a firm should publicize both types of its ESG actions to optimize their effectiveness. One limitation of this study is the potential oversight of certain aspects of top management teams and board diversity. Originality/value: The study provides a more in-depth understanding of ESG actions and their relationships to corporate financial performance, by adopting the concept of internal and external actions for ESG and examining the moderating role of customer awareness in the relationships. We found the beneficial interaction effects between ESG actions and customer awareness are more pronounced with external ESG actions, than with internal ESG actions.