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Abstract: Amid increasing investor expectations regarding the implementation of Environmental, Social, and Governance (ESG) principles, this study aims to present empirical evidence on the determinants of ESG practices encompassing strategic orientation, risk-taking, and firm life cycle, and their economic consequences for firm value and the cost of debt. Using ESG score data from the Refinitiv Eikon database for public companies in ASEAN and Western Europe from 2013 to 2023, this study adopts a two-stage econometric approach to test these relationships. Initial analysis using a static panel model (fixed effects) indicated that ESG practices are negatively correlated with firm value and positively correlated with the cost of debt. However, static models may have potential bias because they ignore the inherent endogeneity and data persistence issues in financial and ESG variables. This study provides alternative methods to address potential bias by applying a methodology that can handle potential endogeneity and data persistence issues: dynamic panel data analysis using the General Method of Moments (GMM). The GMM model yielded fundamentally different findings: after controlling for endogeneity and data persistence, the previously significant causal relationships between the strategic determinants, ESG practices, firm value (measured by Tobin's Q), and the cost of debt were found to be insignificant. Conversely, the main finding from the GMM model is the existence of a very strong and dominant data persistence effect, indicating that historical performance is a much stronger predictor of current performance. A crucial implication of this research is that the link between ESG and financial performance is likely to be more complex and indirect, highlighting the importance of selecting the appropriate econometric method to avoid erroneous and potentially biased conclusions in ESG research. DOI: https://doi.org/10.51505/IJEBMR.2025.91223 |
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