The Role of Corporate Sustainability on Firm Value: An Application on Borsa Istanbul

The Role of Corporate Sustainability on Firm Value: An Application on Borsa Istanbul

Nida Abdioglu (Bandirma Onyedi Eylul University, Turkey)
DOI: 10.4018/978-1-7998-1196-1.ch012

Abstract

This study investigates the role of listing in sustainability index on the firm values of Borsa Istanbul firms. Furthermore, the interaction effects of some firm specific characteristics on firm value are investigated. Firstly, the impact of each firm specific characteristics, and mainly sustainability dummy, on firm value is analysed. It is found that firms that are listed in BIST Sustainability Index have higher firm values. Secondly, the interaction terms with sustainability dummy and each firm-specific characteristic are created. It is concluded that, among the firms listed in BIST sustainability index, firms with higher leverage ratios, lower current ratios, lower price to equity ratios, lower asset turnover ratios, and lower tangibility ratios have higher firm values.
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Introduction

Corporate sustainability is an approach that creates value for shareholders and stakeholder by embracing opportunities and managing risks deriving from economic, environmental, and social developments (Dow Jones, 2019). Moreover, corporate sustainability is composed of three types of sustainability: economic, environmental and social sustainability. Economic sustainability occurs with strong financial structure and high profit of the firm. Environmental sustainability states the firm's avoidance of environmental damage in its production processes and protection of natural resources for future generation. Social sustainability expresses enhancement of living conditions and working conditions of the employees, giving importance to the life quality of the customers, society and future generation (Gencoglu and Aytac, 2016).

Not only financial factors are considered for the developments of the companies, but also social and environmental factors should be considered. As a result, sustainable development has become an important area for the companies. Managers of sustainable companies take into consideration some non-financial factors for their performances such as environment protection, corporate governance structure, human capital management, quality of management, human capital management, reputation, stakeholder relations (Lo and Sheu, p. 345, 2007). Most of the international institutions such as United Nations, G20 and OECD state that in order to obtain long term development and stability, problems such as climate change, exhaustion of natural resources, human rights violation should be solved and this might be done by the increasing the environmental, social and corporate governance implementations of the firms (PWC,2011).

Sustainability reports include information about the companies' non-financial activities including governance, environmental and social issues. The information that the sustainability reports contain might be explained in different topics: i) profile of the company, goods and services that the company provide, structure of shareholding, investor relations, ethics and sustainability approach. ii) financial structure of the firm, financial and operational information, creation of employment, shareholders, and new business opportunities. iii) customers and producers of the firm, responsibilities about goods and services. iv) environment policy of the firm, investments of the firm, the energy efficiency, energy usage in the firm, environmental impacts of the firm including water and waste management. v) employment, motivation and continuity. vi) learning and innovation, responses to environmental and social risks (Aydın, 2017, p.2310).

In the new world order, the companies have to consider not only the benefits of the shareholders but also the benefits of the society. The companies which only work for the profit maximisation for the expense of shareholders can not protect their competitiveness. The most important reason behind this is that the society give importance to the sustainability factors in the companies. Thus, companies should take into account the sustainability issues in their operations. The factors that push the companies in applying sustainability policies can be diversified. Borsa Istanbul juxtapose these factors in its sustainability report (BIST, 2014, p.19). Firstly, these companies have higher brand values and reputation. Secondly, with applying sustainable policies the companies will be able to decrease their costs and their profit will increase. For instance, low energy consumption, decreased raw materials waste are among the environmental sustainability factors that decrease the costs of the companies. Moreover, skilled labour prefers to work with those firms applying sustainability policies. Fourthly, by the help of the sustainability the companies can understand the expectations of the consumers. The consumers might want environment protection and the companies have to make their operations in line with this expectation. Fifthly, the financial institutions embrace sustainable finance and they can direct their investors to the companies that apply sustainability policies. This prompt the companies to apply sustainability policies. Lastly, the sustainable companies have longer life because of the policies they apply. For instance, those companies consider corporate governance principles and as a result they have higher corporate governance values. Thus, those companies have lower cost of equity, higher liquidity, and as a result they have higher service life.

Key Terms in this Chapter

Institutional Investors: An institutional investor is a large organisation that invest on behalf of other people. Mutual funds, banks, insurance companies, hedge funds are among examples of institutional investors.

Corporate Sustainability: Corporate sustainability is an approach that creates value for shareholders and stakeholder by embracing opportunities and managing risks deriving from economic, environmental, and social developments

Corporate Governance: Corporate governance includes the processes, rules and practices by which companies are operated and controlled.

BIST Sustainability Index: It is an index that provides information about Borsa Istanbul companies which have high performance on corporate sustainability

Corporate Social Responsibility: Corporate social responsibility is a management perception whereby firms consider economics, social and environmental issues in their operations.

Corporate Social Reporting: Corporate social reporting is a procedure that contain reporting of the social and environmental effects arising from the companies’ activities. It also includes managements of these effects.

Corporate Disclosure: Corporate disclosure is giving relevant information about the company to the public with the help of the financial reports.

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