Stuart L. Gillan, Jay C. Hartzell, Andrew Koch, and ... - Pitt Business

improve, consistent with intuitional investors pressuring firms to improve their governance
practices. Although this measure of governance and is quite different from other measures of
governance used in the literature, it is consistent with earlier studies.
ESG and valuation
Finally, we address the issue of whether or not firms’ ESG strategies have broader
valuation consequences. Prior work has examined this issue. For example, Ioannou and
Serafeim (2010) argue that if CSR strategies are value-creating, they should be reflected in
valuations, and then test for such a relation. Their focus is on how financial analysts perceive
CSR activities by firms. The authors report that analyst perceptions have changed over time. In
the early years of their sample, it appears that CSR strategies were perceived as value-destroying,
and thus had a negative impact on investment recommendations. However, in the latter years of
their sample, Ioannou and Serafeim report that CSR strategies were perceived as value
enhancing, and positively associated with investment recommendations. In contrast, Fernando,
Sharfman and Uysal (2010) find that green environmental strategies do not increase the market
valuation, but that toxic environmental strategies are associated with reduced valuations.
Consistent with prior work, we examine whether or not ESG scores are associated with
value by estimating the relation between Tobin’s q and ESG scores. Specifically, we model
Tobin’s q as a function of the net score on each of the ESG measures, along with controls
including firm size, leverage, and the ratio of advertising to total assets. As in our previous tests,
the regressions include industry and year fixed effects, with standard errors that are clustered at
the firm level.
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