How ESG and Agency Costs Affect Production Efficiency under External Financing Constraints in Korea

This study examines how ESG (environmental, social, and governance) performance and agency costs influence the production efficiency of firms. While ESG initiatives have gained significant attention for their role in sustainable business practices, their direct effect on operational efficiency remains underexplored. Similarly, agency costs—stemming from conflicts of interest between managers and shareholders—are known to distort resource allocation and reduce a firm’s production efficiency. Using a panel dataset of companies listed on the Korean market from 2012 to 2022, production efficiency is estimated through stochastic frontier production function. The production efficiency of Korean firms is, on average, 0.67. We find that higher ESG performance is positively associated with greater production efficiency, while elevated agency costs significantly hinder this efficiency. Furthermore, mediation analysis suggests that ESG practices partially mitigate the negative impact of agency costs by improving transparency and stakeholder alignment. These results contribute to the literature by clarifying the dual role of ESG as both an enhancer of production efficiency and a mitigator of agency problems. Our findings provide practical insights for managers and investors aiming to enhance operational performance through strategic ESG implementation and governance reform.