Financial Constraints and the ESG-Firm Performance Nexus in the Automotive Industry: Evidence From a Global Panel Study

Abstract

This study examines the complex relationship between environmental, social, and governance (ESG) and financial performance in the automotive industry, with a particular focus on how financial constraints shape this relationship. Using a global data set for the period 2008 to 2023 and employing a range of panel data techniques, including those addressing endogeneity concerns, we find that higher ESG scores positively affect financial performance. Specifically, a one-point rise in ESG score corresponds to an estimated 1-1.7% increase in the market-to-book ratio, with the effect reaching approximately 1.6% for firms facing financial constraints. These findings highlight the economic significance of ESG engagement, particularly for resource-constrained companies. The novelty of this study is that it focuses on the automotive sector, an industry with limited ESG-specific research, and that it makes a theoretical contribution by linking ESG performance outcomes to financial constraints, an angle largely overlooked in prior research. The findings offer critical policy insights, emphasizing the strategic importance of ESG initiatives for value creation under varying financial conditions.