Valuation of ESG factors: the moderating effect of cash holdings
Environmental, Social and Governance (ESG) practises
In this paper, we examine the value effects of investments in ESG practices by focusing on the valuation of a specific asset class, namely cash holdings. The main idea is that shareholders would value one dollar of cash at a premium when this dollar is invested in companies that follow a more stringent ESG strategy than in companies that do not. We argue that ESG initiatives can be value-enhancing investments if they enable companies to acquire resources that are valuable, unique, and inimitable (Barney 1991), and if they receive the support of key stakeholders (Freeman 1984). Therefore, by internalizing these resources companies create a sustainable competitive advantage that ultimately increases firm value.
Presented on August 29-30 at the International Workshop on Financial System Architecture & Stability (IWFSAS) held at the University of Victoria in Victoria, British Columbia.
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