Shahmalarani, Chandran (2025) The impact of environmental, social and governance practices on financial performance of Malaysian firms: a generalized method of moments analysis. Masters thesis, Sunway University.
Full text not available from this repository.Abstract
The incorporation of environmental, social, and governance (ESG) aspects towards the financial performance of firms has been widely addressed and has contributed to firms’ sustainability studies in recent years. Despite extensive literature on the impact of ESG practices on a firm’s financial performance, the relationship remains inconclusive, potentially due to inadequacies in the econometric methods used to address endogeneity. Furthermore, research on sustainability performance has predominantly focused on developed countries, with limited studies exploring emerging economies such as Malaysia. Notably, the few existing studies on Malaysia’s market often overlook the endogeneity effect of regressors, leaving a significant research gap that highlights a critical area for further investigation. Thus, this study aims to address this gap by analyzing the impact of ESG practices on the financial performance of Malaysian firms, thereby contributing to the literature on developing economies. Although a number of studies have applied the generalized method of moments (GMM) in the context of ESG and firm performance, this study offers a novel contribution by focusing on Malaysian firms, particularly through the simultaneous analysis of both aggregate and disaggregate ESG components within a dynamic panel framework. Using unbalanced panel data of 454 observations from 2014 to 2024, extracted from Thomson Reuters’ Refinitiv Asset4 database, this study demonstrates that properly addressing endogeneity using dynamic panel data estimation significantly alters some findings from earlier studies. The initial regression of the aggregate and disaggregated ESG variables using static panel data regression models revealed significant results for both the aggregate (overall score) and disaggregated (individual scores) ESG variables. However, the Durbin-Wu-Hausman test confirmed that both the aggregate and disaggregate components of ESG variables except for the environmental component exhibit endogeneity and pooled ordinary least square is inadequate in analyzing the relationship. Subsequent analyses using fixed effects (FE) and random effects (RE) models, supported by the Breusch-Pagan Lagrange Multiplier (BPLM) and Hausman specification tests, indicated that fixed effects were the most reliable static panel regression estimation model. Nevertheless, the assumption of strict exogeneity in the fixed effects model was violated due to the dynamic relationship between ESG and the firms' past financial performance. Therefore, the study employed dynamic panel data estimation, namely difference and system GMM techniques to analyze the ESG-FP full-term relationship. The result of the dynamic panel data regression analysis suggests that both aggregate ESG and individual components of Environmental (Env), Social (Soc) and Governance (Gov) factors yield insignificant results, suggesting that these variables do not impact the financial performance of firms. The analysis that initially appeared significant when examined using POLS yielded misleading results of the relationship. These findings provide evidence that significant results from previous research using static panel data regression models may lead to ambiguous interpretations of the ESG-FP relationship, highlighting the need for further attention, with a particular focus on addressing endogeneity concerns in future studies.
| Item Type: | Thesis (Masters) |
|---|---|
| Uncontrolled Keywords: | ESG; financial performance; generalized method of moments; endogeneity |
| Subjects: | H Social Sciences > HF Commerce H Social Sciences > HG Finance H Social Sciences > HJ Public Finance |
| Divisions: | Sunway University > School of Mathematical Sciences Sunway University > School of Mathematical Sciences > Department of Actuarial Science and Risk |
| Depositing User: | Ms Yong Yee Chan |
| Date Deposited: | 20 Oct 2026 10:34 |
| Last Modified: | 20 Oct 2026 10:54 |
| URI: | http://repository.sunway.edu.my/id/eprint/3663 |
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