The effect of corporate governance on the relationship between sustainability and profitability
Herttuainen, Laura (2024-01-16)
Herttuainen, Laura
L. Herttuainen
16.01.2024
© 2024 Laura Herttuainen. Ellei toisin mainita, uudelleenkäyttö on sallittu Creative Commons Attribution 4.0 International (CC-BY 4.0) -lisenssillä (https://creativecommons.org/licenses/by/4.0/). Uudelleenkäyttö on sallittua edellyttäen, että lähde mainitaan asianmukaisesti ja mahdolliset muutokset merkitään. Sellaisten osien käyttö tai jäljentäminen, jotka eivät ole tekijän tai tekijöiden omaisuutta, saattaa edellyttää lupaa suoraan asianomaisilta oikeudenhaltijoilta.
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:oulu-202401161265
https://urn.fi/URN:NBN:fi:oulu-202401161265
Tiivistelmä
Sustainability has grown into a vital part of the corporate world. Corporate sustainability can be based on several reasons, but profitability is necessary for a business, and strategic decisions must be made with profitability in mind. Because of this, the connection between sustainability and profitability has been the interest of several researchers as a positive connection between the subjects would be an important motivator for firms. ESG data is commonly used to measure corporate social responsibility and the ESG score consists of environmental, social, and governance pillars. Corporate governance is an important metric on its own and is a vital part of ESG. The managers and the board of directors are responsible for creating and executing the ESG actions and implementing them into the firm’s strategy. The level of corporate governance can have large differences between countries as the national culture and legislation affect governance, which could be seen in the ESG scores as well. This thesis aims to study the relationship between sustainability and profitability and the effect corporate governance has on it.
The research methodology in this thesis is regression analysis where the effect of the independent variables on the dependent variable is examined. The dependent variable in the study is profitability which is measured with ROA. The independent variables in the study are the ESG score and its pillar scores and a dummy variable describing the level of governance. The effect of corporate governance is illustrated with an interaction term of the ESG score and the governance dummy variable. The control variables in the study are firm size and leverage. The data used in the study consists of 238 firms in the technology industry that have their headquarters in one of the 27 EU countries. The data was collected from the Refinitiv database from the years 2022 and 2021.
The findings of the study reveal that there is no statistically significant connection between sustainability and profitability. It is also found that the level of governance does not affect the relationship between ESG and ROA as the connection between them is not stronger in the firms that are considered to have high governance. The most significant independent variable in the regression was the lagged dependent variable which indicates that profitability is largely affected by the profitability of the previous years. The subject requires further research to explore the governance effect and to profoundly understand the connection between sustainability and profitability. The sample size is quite narrow and as no statistical significance was found the results cannot be generalized.
The research methodology in this thesis is regression analysis where the effect of the independent variables on the dependent variable is examined. The dependent variable in the study is profitability which is measured with ROA. The independent variables in the study are the ESG score and its pillar scores and a dummy variable describing the level of governance. The effect of corporate governance is illustrated with an interaction term of the ESG score and the governance dummy variable. The control variables in the study are firm size and leverage. The data used in the study consists of 238 firms in the technology industry that have their headquarters in one of the 27 EU countries. The data was collected from the Refinitiv database from the years 2022 and 2021.
The findings of the study reveal that there is no statistically significant connection between sustainability and profitability. It is also found that the level of governance does not affect the relationship between ESG and ROA as the connection between them is not stronger in the firms that are considered to have high governance. The most significant independent variable in the regression was the lagged dependent variable which indicates that profitability is largely affected by the profitability of the previous years. The subject requires further research to explore the governance effect and to profoundly understand the connection between sustainability and profitability. The sample size is quite narrow and as no statistical significance was found the results cannot be generalized.
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