The Nonlinear Value Relevance of ESG: Dynamic Panel Evidence from Asian Firms

Abstract

This study examines the nonlinear relationship between environmental, social, and governance (ESG) performance and market capitalization, addressing the inconclusive evidence on the value relevance of ESG. Drawing on stakeholder theory, signaling theory, and the resource-based view, the analysis employs an unbalanced panel of 15,029 firm-year observations from non-financial listed firms across selected Asian economies during 2010–2024. Using a dynamic panel estimator, the results provide formal evidence of a U-shaped relationship between ESG performance and market capitalization. The squared ESG coefficient is positive and statistically significant, while the marginal association is significantly negative at the lower bound of the observed ESG range and significantly positive at the upper bound. The estimated turning point of approximately 33.94 lies within the observed range. The findings remain robust to an alternative instrument lag structure and to ESG performance lagged by one and two years. This study demonstrates that a constant linear specification may conceal substantially different valuation associations across ESG levels. The findings highlight the importance of ESG maturity, suggesting that ESG becomes more positively associated with market capitalization as firms develop more advanced and credible ESG practices. JEL classification numbers: G14, G30, M14, Q56. Keywords: ESG performance, Market capitalization, U-shaped relationship, System GMM, Firm value, Asian markets.