2.1. ESG Performance and Firm Value
From a theoretical point of view, the neoclassical theory suggests that the relationship between ESG and financial performance is uniformly negative [19
]. The underlying and reasonable assumption is that the returns of ESG activities do not exceed their costs and, as [20
] points out, the maximization of owners’ profits is the firm’s only social responsibility. Consequently, recent studies show that firms documenting engagement in environmentally friendly activities or winning green awards exhibit negative abnormal returns [21
]. These findings suggest that investors punish the firm for what they perceive as costly investments [16
]. Similarly, other studies have found a nonsignificant association between ESG score and financial performance [23
]. For instance, [24
] examine the performance of all socially responsible investments (SRI) funds worldwide and show that the risk-adjusted returns of SRI funds are not statistically different from the performance of conventional funds.
Another set of studies argue that ESG practices, particularly corporate social responsibility (CSR), may positively impact firm performance [26
]. According to the stakeholder theory [28
], it is reasonable to expect that socially responsible firms can better satisfy the interests of external stakeholders (e.g., debtors, employees, customers, and regulators), allowing for more efficient contracting [29
] and opening new opportunities for further growth and risk diversification [30
]. For instance, [31
] examined the relationship between ESG performance and firm value in 53 countries, providing evidence of a positive impact of ESG activities on firm value, particularly in countries with lower financial development. Thus, the authors contend that ESG initiatives aid in reducing market failures brought on by institutional gaps.
Along the same lines, several studies have reported a positive link between ESG and nonfinancial performance indicators, such as reduction in material and energy consumption [32
], motivating employees and creating a bonding mechanism for them [33
], enhancing customer loyalty [34
], advertising effectiveness and brand reputation [36
], reduction of regulatory burden [28
], and overall customer satisfaction [39
2.2. ESG Performance and Family Firm Value
On the association between family-owned firms and the adoption of ESG practices, conflicting forecasts have been made. On the one hand, based on the SEW framework, family firms could be more eager to commit to environmental protection to preserve their family’s affective endowment (Indeed, the latter is made up of several dimensions, condensed in the FIBER acronym: family control; identification of members with the firm; binding social ties; emotional attachment, and renewal of family bonds through succession). Overall, this could represent a prosocial and positive stimulus [12
], as they can inspire family firms to demonstrate care for their stakeholders. In line with this argument, [11
] stated that family businesses would be more inclined to perform social behavior that benefits external stakeholders (such as pollution prevention practices), to obtain greater reputational benefits. Analogously, [41
] highlighted that family businesses tend to pursue non-financial goals to the benefit of the stakeholders of the firm to build and preserve corporate reputation.
The stewardship theory is a different viewpoint that argues that family ownership and ESG are positively related [9
]. Since family managers identify with their firm [43
], they tend to pursue the continuity of the family business, which they oversee with the intention of growing and passing it down to the following generation of family members. In this interpretation, family managers will tend to make long-term investments and establish long-lasting relationships with stakeholders. Therefore, strengthening social binding ties can make them more inclined to contribute to wider societal interests through improving environmental and CSR [44
Regarding theoretical research, there is no consensus on whether family businesses are more likely to adopt ESG policies than non-family businesses. In this sense, different strands of literature provide diverse views about the potential influence of family ownership on this matter [6
]. For instance, under the SEW approach, family firms’ top management teams tend to prioritize non-financial goals which aim to enhance aspects such as family identity, image and reputation [7
However, if family economic interests prevail over social wellness (“amoral familism”, [10
]) or the dark side of SEW predominates, family-owned firms could be unwilling to carry out ESG policies [12
]. Furthermore, family-centric behavior prioritizing kindship might worsen relationship conflicts within the controlling family, which may lead firms to avoid risky and innovative investments such as those required for implementing environmental strategies [14
]. Thus, these assertions imply that, under certain conditions, family firms would be reluctant or do not have the proper incentives to adopt and implement ESG practices. In summary, the association between ESG performance and family firm value might be either positive or negative.
The relationship between ESG activities and family firm value may go either way.
According to the SEW approach, businesses can meet their social obligations and improve their CSR among their stakeholders by implementing socially and environmentally responsible business practices [8
]. Along the same lines, the stewardship theory considers family firms’ managers as guardians of the firm, who must safeguard the firm’s long-term success and community wellness, for instance, through environmentally responsible investments [9
]. These arguments suggest that family firms tend to adopt ESG practices to strengthen their reputation with different stakeholders.
In terms of environmental responsibilities, most extant literature has focused on examining the ESG environmental performance of large family businesses with operations mainly in developed countries [44
]. For instance, [45
], using a sample of US-listed firms, reported that family-owned firms implement and exhibit a better environmental performance relative to non-family firms to preserve their SEW. In addition, this relationship is unaffected by the type of family ownership. More recently, [44
] used a sample of European firms to examine whether the environmental performance in family firms is conditional upon the firm size and the involvement of family members in the top management team. The author finds that the positive effect of family ownership on environmental performance is stronger for small companies with a diversity of family and non-family members in the management team. We postulate the following hypothesis:
There is either a positive or a negative relationship between environmental performance and firm value.
A group of authors focused on the role of family firms who invest in social activities to pursue their SEW and maximize shareholders’ value (Cennamo et al., 2012). Other studies contend that family businesses cannot devote their attention to organizing CSR (Burak and Morante, 2007; Morck and Yeung, 2004). Even some authors argue that opportunism emerges in public family firms when they reach certain positions [6
]. Berrone et al. (2012) proposed that the differences in those results are based in the distinction family firms may make along their life. They could prioritize maintaining their good name and reputation above having their SEW be overshadowed by their dominance and influence within the organization.
Regarding empirical evidence associated with the social pillar of ESG, [7
] explored the relationship between family ownership and the several dimensions of CSR. Based on a sample of the largest US firms, the study reports that family ownership positively impacts the diversity, employee, and product dimensions of CSR but negatively impacts the community component.
While there is a growing body of literature about the relationship between family firms and the components of ESG in developed economies [46
], the empirical evidence in emerging economies is less voluminous. As documented by previous studies [1
], emerging economies are characterized not only by low economic and financial development but also by the low quality of the institutional environment. As [14
] pointed out, the institutional environment may also influence the attitude and willingness to carry out ESG practices, particularly those related to the environment. A key factor comprising the institutional environment is regulatory pressure exerted by internal and external stakeholders such as the government [49
]. Regarding social responsibility performance and firm value, we do not know the direction of the relationship between them. We considered the following hypothesis:
There is either a positive or a negative relationship between social performance and firm value.
Firm’s corporate governance performance indicates the governance structure of the firm which includes the rights and responsibilities of the management.
We were unable to locate any empirical data demonstrating a connection between the ESG governance score and family firm value. Most of the literature concentrates its attention on the relationship between governance parameters such as the role duality of chairperson and CEO; stock ownership on firm performance; board size and board meeting and firm performance. The findings are inconclusive; [50
] found a positive and significant relationship between ownership concentration and firm performance, while [51
] did not find a significant relationship between ownership structure and firm performance. Regarding ownership concentration and debt-equity ratio, [52
] showed this to be the drivers of firms’ productivity, [53
] found a negative and significant relationship between controlling shareholder board membership and firm performance for Indian firms, and [54
] reported a non-significant association between family members on the corporate board, independent non-executive directors, board size, director ownership and firm performance. In terms of the duality of chairman and CEO, [55
] found a negative association between role duality and a large board with performance, [56
] reported a negative relationship between the board of directors’ meeting and firm performance, and no relationship between board size and firm performance, and [57
] found a negative association between board size and firm value. As a result, there is no clear evidence linking ESG (governance performance) with company value. Our hypothesis is as follows:
There is either a positive or a negative relationship between governance performance and firm value.
2.3. ESG Performance and Family Firms Value: The Role of Agency Problems
Agency theory deals with the relationship between two parties, the principal (owner) and the agent (manager). This theory was developed by [58
]. Agency theory examines the relationship from two perspectives: behavioral and structural. According to the theory, agents will act in a way that maximizes their personal welfare, which will typically be detrimental to the principal (owner) [58
]. Therefore, principals will develop mechanisms to monitor the agent in order to mitigate the opportunistic behavior and better align the parties’ interests [58
In general, firms may face two types of agency problems regarding managers and shareholders (Type I and Type II). In the case of family firms, since there is no separation between ownership and control, companies may not be susceptible to Type I agency problems [59
]. However, [66
] challenge this logic. They found that family firms face Type I agency problem. Family ownership provides an effective monitoring on the management to mitigate opportunistic behaviors which may reduce the shareholder wealth.
The authors of [69
] proposed the agency problem Type II, which consists of the conflict that arises from the principal-principal relationship, i.e., between the major owner and minority shareholders. Other authors also described an owner-owner agency problem [70
]. The family, being the major shareholder (principal), has incentives to extract wealth from the minority shareholders (principal) for their own benefit (opportunistic behavior). This problem is more intense in family firms with highly concentrated ownership, strong control on corporate governance and tied management of the firm. Under these circumstances, incentives are high to maximize the wealth of the family group [76
]. A well-known mechanism to redistribute wealth is through free cash flow [77
]. In this scenario, the majority owners might invest any excess cash flows for their own gain, lowering the wealth of the minority owners.
In practice, we can observe some family firms who mitigate agency costs, since for them it is either economically convenient or because they increase their SEW. In other cases, the agency problem will persist due to the families’ opportunistic behavior. There is evidence in both directions. For example, [78
] reported that family firms are less efficient than nonfamily firms due to unique agency costs (altruism and family entrenchment). On the other side, for example, [79
] demonstrated that having family members on the board lowered employee turnover and acted as a family dispute mediator, both of which saved agency expenses. We believe that there is a high probability of having firms with agency costs (Type II) due to the variety of firms with high ownership concentration in the sample (the major owner in average holds 35.2% of the stocks).
Family firms that have agency problems will exhibit a lower impact of ESG performance on firm value.
2.4. ESG Performance and Family Firms Value: The Role of the Financial Constraint
Regardless of whether a SEW or stewardship position predominates in the family business, it faces financial restrictions to maintain ESG activities. In fact, family businesses must find funding sources that optimally maximize the value of the firm and the wealth of the family in order to finance ESG activities such as pollution prevention techniques or to contribute to broader societal interests through improving environmental and corporate social responsibility.
The financial literature offers conflicting evidence on how a family firm manages its financial constraints. On the one hand, due to information gaps between outside investors and the family’s primary owners, family firms are more constrained financially [80
], avoiding the company receiving excessive financing. In turn, family controlling shareholders can prefer long-term debt since they are concerned with reducing their personal risk exposure and avoiding loss of control [81
]. On the other hand, compared to non-family firms, there is less asymmetric information and fewer agency issues between family owners and creditors because of the family’s long-term commitment and significant ownership in the company. These characteristics make it easier for the family firms to access the capital market, with less dependence on internal funds [82
]. In turn, family firms can use intangible assets like family reputation as collateral to obtain external finance sources [83
However, considering the relationship between ESG activities and performance in family firms, boosting ESG activities which face financial restrictions would result in a drop in the performance of the family firm. On the other hand, if ESG initiatives have a negative impact on the family business’s performance, such financial constraints would make it less successful. Therefore, we put forward the following hypothesis:
Family companies that carry out ESG activities and face more financial restrictions present lower performance compared to those family firms which are less financially restricted.