The impact of sustainability reporting quality on the value relevance of corporate sustainability

performance

Abstract

The value relevance of corporate sustainability performance (CSP) has been studied from different
theoretical perspectives, yielding inconclusive evidence. Therefore, it is imperative to revisit
corporate sustainability performance relevance for investors. This study explores the value relevance
of corporate sustainability performance by studying the impact that the quality of sustainability
reporting has on it. It employed the panel data of 247 firms from 2012 to 2016 for the best 30 green
capital markets ranked by the Global Green Economy Index. The results indicated that investors value
corporate sustainability performance (achieved through social, economic, and corporate governance
dimensions only) and the quality of sustainability reporting. However, the environmental dimension
of CSP lacks financial materiality for inves-tors. Furthermore, the quality of sustainability reporting
plays an instrumental role in the value relevance of the corporate governance dimension because it
is perceived as an alternative corporate governance mechanism by investors. The findings are useful
for practitioners, regulators, and other stakeholders interested in understand-ing the value relevance
of corporate sustainability performance and quality of sus-tainability reporting.

KE YWOR DS

alternative corporate governance mechanism, corporate sustainability performance, quality of

sustainability reporting, share value concept, stakeholder perspective, value relevance

1 | INTRODUCTION

Sustainable development advocates economic and social development while simultaneously avoiding
environmental degradation and ensur-ing the optimal utilization of natural resources. Corporations
play an important role in achieving the objectives of sustainable development by adopting business
policies and practices that maximize share-holders' wealth, economic and social well-being of its
employees, and of the society in general without adversely affecting the environment (Mensah,
2019). Such activities of firms that contribute to sustainable development constitute corporate
sustainability, which is the process of balancing economic, ecological, and social concerns (do Prado
et al., 2020; Elkington, 1999). It is determined through the CSP of firms, which signifies how a firm's
business activities impact the envi-ronment, society, and the overall economy. This impact can be
either positive or negative (do Prado et al., 2020).

Sustainability reports are critical components for communication of corporate commitment and
performance on sustainability issues (Boiral, Heras-Saizarbitoria, & Brotherton, 2019; Fonseca,
McAllister, & Fitzpatrick, 2014; Hahn & Kühnen, 2013). However, the trustworthi-ness and reliability
of these reports are widely criticized in the litera-ture.1 This is addressed by instilling the assurance
process of sustainability reporting to ensure the quality and reliability of the information disclosed
(Dando & Swift, 2003; King & Bartels, 2015; Rasche & Esser, 2006). One of the fundamental
objectives of sustain-ability reporting (GRI, 2009) and quality of sustainability reporting is to provide
relevant and reliable information to investors for estimating the company value for equity investment
decisions (i.e., Boiral et al., 2019; Manetti & Becatti, 2009; Moroney, Windsor, & Aw, 2012).

This phenomenon is investigated empirically by assessing the rel-evance of sustainability information

and the quality of sustainability information for investors. These investors wish to estimate the com-
pany value. However, a vital question is, despite the relevance of this reliable sustainability
information for decision-making, how is this information perceived by investors, negatively or
positively? An unre-solved research issue in the financial literature is the establishment of a business
case of CSP of firms. Therefore, scholars studied the busi-ness case of corporate sustainability
performance of firms by examin-ing its value relevance and investigating its relationship with the
firm's financial performance (Rivera, Muñoz, & Moneva, 2017).

Consequently, the existing literature is dominated by two contra-dictory hypotheses: The social
impact and trade-off hypotheses. The former suggests that serving the interests of a broad class of
stake-holders enhances the financial performance of a firm, which ultimately increases shareholders'
wealth. The latter states that a firm's sustain-ability activities incur unnecessary costs, reducing the
firm's profitabil-ity. This negatively impacts shareholders' wealth (Marom, 2006; Preston &
O'Bannon, 1997). In view of these two contradictory hypotheses and the inconclusive empirical
evidence, it is imperative that the value relevance of the CSP is explored in-depth to reconcile these
opposing views, leading us toward a unified theory.

In this context, this study explores the incremental value rele-vance of CSP while considering the
quality of sustainability reporting. This is an important factor for stock market participants.
Furthermore, to make the empirical results more general, this study used an interna-tional sample
comprising firms across regions from both emerging and developed markets from 2012 to 2016.
Previous studies concentrated on domestic firms within the market. Hence, the results varied from
market to market.

This study's contribution to existing literature is twofold. First, we not only intended to understand
the value relevance of the overall CSP and individual dimensions of CSP by applying the quadruple
mea-surement approach of CSP (i.e., environmental, social, governance, and economic) but also
included the quality of sustainability reporting as a robust proxy to account for value relevance, CSP,
and its dimen-sions. Most of the existing literature on value relevance does not con-sider the role of
quality of sustainability reporting while studying value relevance2 and largely uses the ESG
measurement approach for corporate sustainability (i.e., environmental, social, and governance),
narrowing the research parameters. Second, a major shortcoming of existing studies is that they
focus on specific countries or regions, such as the USA, Europe, UK, and Brazil and use samples only
from specific industries. Conversely, this study used a global sample includ-ing both emerging and
developed markets across regions to better understand the dynamics of value relevance of CSP and
quality of sus-tainability reporting for the given markets, ignoring the concept of uniqueness.

2 | LITERATURE REVIEW

The stakeholder3 theory suggests that organizations must cater to the interests of a broader class of
stakeholders to be successful. There-fore, organizations should focus on their primary stakeholders,
such as employees, customers, shareholders, government, as well as second-ary stakeholders, such
as the environmentalist group and medial and civil societies' groups (Donaldson & Preston, 1995;
Freeman, 1984; Schaltegger, Hörisch, & Freeman, 2019). Even though an organization has a diverse
group of stakeholders with different and conflicting interests, it must choose business policies and
practices that are bene-ficial for all stakeholders (Darnall, Henriques, & Sadorsky, 2010).

The existing literature on the value relevance of CSP of firms rev-ealed two conflicting views about
the social and environmental activi-ties of firms: The social impact hypothesis4 and the trade-off
hypothesis5 (Chen & Lee, 2017). The social impact hypothesis sug-gests that social activities,
including environmental activities, posi-tively affect the financial performance of firms. This view is
consistent with the stakeholder theory, which considers sustainability activities to be important for
shareholders, rendering them value relevant (Alshehhi, Nobanee, & Khare, 2018). On the other hand,
the trade-off hypothesis suggests that firms involved in social and environmental activities sacrifice
their valuable financial resources. This sacrifice is against the interests of shareholders (Chen & Lee,
2017). Further-more, shareholders negatively view such activities that ultimately have an adverse
effect on the firm's market value. Hence, sustainable activities of firms are not value relevant
(Alshehhi et al., 2018; Chen & Lee, 2017; Donaldson & Preston, 1995).

Considering these contradictory views on sustainability activities, Porter and Kramer (2006, 2011)
explored the link between societal and economic progress from a different perspective. They
advocated that, since firms cannot solve all social and environmental problems of the society, they
should focus on social and environmental activities. Therefore, these activities are mutually
beneficial to the society as well as the firm, consequently, making reconciliation between the two-
opposing hypotheses possible. Porter and Kramer (2011) intro-duced the concept of shared value.
They defined shared value as “the policies and operating practices that enhance the competitiveness
of a company while simultaneously advancing the economic and social condi-tions in the
communities in which they operate.” Shared value focuses on identifying and expanding the
connection between social and eco-nomic progress. Accordingly, if a firm chooses social and
environmen-tal activities that commonly benefit the society and firm alike, then these activities
would positively influence the firm's value, upholding the value-enhancing theory. Contrarily, if a firm
does not choose the combination of social and environmental activities that are beneficial to both
the firm and society, then such activities would decrease the value, upholding the trade-off theory.
Therefore, it is necessary to conduct an empirical study on the value relevance of CSP from the
shared value perspective. This study did so using the stakeholder the-ory along with the concept of
share value as the theoretical foundation.

2.1 | Value relevance

Value relevance is the ability of a performance measure to explain var-iations in contemporaneous

stock returns. It is the estimate of the performance measure's usefulness in equity investors'
decision-making (Barton, Hansen, & Pownall, 2010). Traditionally, the focus on value relevance has
been limited to financial information, such as sales, earnings, book values of equity, comprehensive
income, and operating cash flows (Amir, Harris, & Venuti, 1993; Beisland, 2009). Another stream of
value relevance has evolved, which considers non-accounting variables as an important factor in
determining stock prices (Amir & Lev, 1996; Aureli, Gigli, Medei, & Supino, 2020; Carnevale, Mazzuca,
& Venturini, 2012; Hughes, 2000; Lapointe-Antunes, Cormier, Magnan, & Gay-Angers, 2006; Xu,
Magnan, & André, 2007).

It is emphasized that accounting information is not the only factor that explains the variation in
market value of firms. Nonaccounting is an equally important factor influencing market value and its
variation (Aureli et al., 2020; De Villiers, Hsiao, & Maroun, 2017; La Torre, Sabelfeld, Blomkvist,
Tarquinio, & Dumay, 2018; Lombardi, Trequattrini, Cuozzo, & Cano-Rubio, 2019). Consequently, the
value relevance of nonfinancial research mostly revolves around CSP and its dimensions (Aureli et al.,
2020). This premise adds quantitative and qualitative measures as a pivotal factor in explaining
variation in con-temporaneous stock prices.

2.2 | Value relevance of corporate sustainability through individual dimension

The literature on the value relevance of corporate sustainability mainly focuses on the individual
dimensions of corporate sustainabil-ity. This stream of literature is based on the theoretical
proposition that investors exhibit socially responsible investing behavior and inte-grate personal
value and societal concern into investment-related decisions (Waddock, 2003). Furthermore, firms'
environmental/social engagement increases long-term profit by reducing resource wastage,
improving processes and products, decreasing conflict costs with external stakeholders, corporate
reputation advantage, employees' retention and productivity, and reduction in cost of capital (Heal,
2005). Although the corporate governance dimension is con-cerned with managing, controlling, and
reporting these activities, it is largely ignored by these studies.

Within the scope of empirical investigation, Hassel et al. (2005) examined the value relevance of
environmental performance using the Ohlson (1995) model. They used environmental ratings as a
proxy for environmental performance and found a negative relationship between environmental
performance and market value of firms. Alter-natively, Sinkin, Wright, and Burnett (2008) and
Semenova, Hassel, and Nilsson (2010) depicted a positive relationship. Sinkin et al. (2008) used the
Ohlson model and revolved around the relationship between the adoption of an eco-efficient
business strategy signaled by the issuance of corporate environmental reports and firm value.
Semenova et al. (2010) investigated the relationship between the market value of equity and the
environmental performance of 300 Swedish listed companies. Another study by Cormier and
Magnan (2007) conducted an analysis on Canada, France, and Ger-many to identify the effect of
voluntary environmental reporting on earnings. They found no relationship between environmental
reporting and earnings in France, whereas a positive effect was accomplished in Germany and
Canada. Thus, results may vary from country to country and market to market.

2.3 | Value relevance of corporate sustainability through corporate sustainability reporting

Another stream of value relevance focuses on analyzing the value rel-evance of corporate
sustainability through its disclosure. Theoreti-cally, this stream of literature posits that a reduction in
information asymmetry among stakeholders would enhance the market value of firms. The
sustainability report is a major step in the direction of reducing information asymmetry (Schadewitz
& Niskala, 2010). How-ever, it failed to recognize that it is not only information asymmetry which
influences investors' investment-related decisions, but the actual content of report and information
reliability also majorly impact the market value of firms (Kaspereit & Lopatta, 2016). Hence, a com-
prehensive approach should be employed to understand the value rel-evance of corporate
sustainability.

Empirically, studies, such as Schadewitz and Niskala (2010), Marna et al. (2015), and Bernardi and
Stark (2018) established the value-enhancing impact of corporate sustainability disclosure.
Schadewitz and Niskala (2010) identified the relationship between responsibility reporting and firm
value for the Finnish stock market from 2002 to 2005. Marna et al. (2015) examined the association
between share prices and the level of corporate social responsibility (CSR) disclosure of large UK
companies using a modified Ohlson (1995) model. They used three different proxies for CSR to check
the robustness of the results. Eventually, Bernardi and Stark (2018) investigated the cross-country
value relevance of disclo-sure of information regarding environmental and social activities and
performance in Europe.

However, contradictory results were revealed by Cardamone et al. (2012), who focused on the value
relevance concept of the social reports on 178 listed Italian firms. They reported a negative associa-
tion between market value and social reporting. Recently, this view-point was endorsed by Aureli et
al. (2020). Their study focused on the value relevance of environmental, social, and governance
disclosure by drawing samples from the Dow Jones Sustainability World Index–listed companies.

2.4 | Value relevance of corporate sustainability through CSP

A new trend also emerged in the value relevance of corporate sustain-ability research while
maintaining a focus on the overall CSP through the environmental, social, and governance (ESG)
approach. Theoreti-cally, this line of literature propagates that ESG performance is consid-ered an
intangible asset by investors and is reflected in the market value of firms (Heal, 2005; Kaspereit &
Lopatta, 2016). ESG includes the corporate governance dimension of corporate sustainability along
with the environmental and social dimensions. This corporate gover-nance aspect deals with how
firms are managed and controlled to pro-vide transparency in financial reporting, risk management,
and stakeholder rights. Hence, corporate governance is an important fac-tor in corporate
sustainability, as it aligns investors' interest with the firm's overall objective (Eurosif, 2006).6 In view
of the concept of shared value of Porter and Kramer (2006, 2011), it is considered that a firm's
sustainability activities are value relevant if they are mutually beneficial for both the firm and society.
Therefore, it can be argued that the economic aspect of firms is equally important along with the
ESG approach for sustainable development. However, the economic dimension is largely ignored in
the literature focusing on ESG.

With reference to the empirical literature on value relevance of corporate sustainability

performance, Kaspereit and Lopatta (2016) carried out a value relevance study of CSP using the
Ohlson model. The authors reported a positive association between CSP and market valuation.
Lourenço et al. (2012) examined the CSP of firms measured by the membership of the Dow Jones
sustainability index influences on the market value of equity. They reported that CSP has a signifi-
cant explanatory power for stock prices over traditional summary accounting measures. Similarly,
Jung et al. (2018) conducted a study on the relationship between CSP and financial performance of
firms based on the Korea Sustainability Index. They also used the Ohlson model for their empirical
analysis. They also reported a positive rela-tionship between CSP and the financial performance of
firms. Chang and Kuo (2008) studied the interrelationship of corporate sustainable development
(corporate sustainability performance) and financial per-formance for a sample of 311 global public
firms belonging to six industries. Their results showed that high sustainability performance positively
affects firms' profitability. Similarly, profitability has a posi-tive effect on a firm's sustainability
performance. This study suggests that there is a reciprocal relationship between the two variables.

Miralles-Quirós, Miralles-Quirós, and Gonçalves (2018) identified the value relevance of CSP (i.e.,
environmental, social, and governance dimensions). They concluded that social and corporate
governance practices have value relevancy for only environmentally sensitive industries, and
environmental indicators have value relevancy for only environmental nonsensitive industries. Aras,
Tezcan, and Fur-tuna (2018) investigated the value relevance of multidimensional CSP in Turkish
banks and found no value relevance of CSP.

2.5 | Value relevance of CSP and quality of sustainability reporting

An analysis of the literature review revealed that researchers mostly focus on the individual
dimensions of CSP. Few studies employ a comprehensive measure of CSP but fail to reach consensus.
The reason behind this inconclusiveness is because they ignore the most important factor (i.e.,
quality of sustainability reporting) that influ-ences the value relevance of CSP. It is believed that stock
market par-ticipants, such as investors and even financial analysts, are more interested in the quality
of sustainability information, as reliable infor-mation would be difficult to obtain (Cho et al., 2015;
Laufer, 2003; Milne et al., 2006; Moneva, Archel, & Correa, 2006). This is more prevalent where the
nature of the reported issue is complex (Ramus & Montiel, 2005; Unerman, Bebbington, & O'Dwyer,
2007).
On the empirical side, Martínez-Ferrero and García-Sánchez (2017) conducted an analysis to identify
the relationship between the quality of sustainability reporting and cost of capital. They depicted
that the quality of sustainability reporting reduces the cost of capital, which in turn implied that the
quality of sustainability is value relevant. This was further validated by a survey conducted by de
Villiers and van Staden (2010). They reported that investors/share-holders demand the quality of
environmental disclosure. Similarly, Bachoo, Tan, and Wilson (2013) studied the relationship between
a firm's value and the quality of sustainability reporting for Australian listed companies. They
reported a positive relationship between qual-ity of sustainability reporting and future expected
performance. Their study suggested that the quality of sustainability reporting is reflected in the
firm's market value. Hence, it serves as an important factor in the value relevance of the
sustainability performance of firms.

2.6 | Research gap

In summary, scholars in the field of sustainable development exam-ined the business case of
corporate sustainability by exploring the value relevance of CSP of firms. Corporate sustainability
increases firm value by reducing conflict costs among stakeholders, improving productivity, retention
of employees, corporate reputation, as well as reducing resource wastage and information
asymmetry.7 However, the literature failed to operationalize a comprehensive theoretical approach
to analyze the value relevance of corporate sustainability. Scholars either employed individual
dimensions or ESGs to capture the value relevance of corporate sustainability. The quadruple
approach of corporate sustainability (i.e., economic, environmental, social, and corporate
governance) is most appropriate for analyzing the relevance of corporate sustainability (Sidhoum &
Serra, 2018).

Studies, such as Kaspereit and Lopatta (2016), Lins et al. (2017), Lopatta and Kaspereit (2014), and
Lourenço et al. (2012), provided evidence in support of the value relevance of CSP. However, there
are other empirical studies, such as Aras et al. (2018) and Cheung (2011), which found no conclusive
evidence. It can be con-cluded from the discussion above that the value relevance of CSP has an
inconclusive theoretical approach and empirical evidence, while the quality of sustainability
reporting has been ignored in value rele-vance literature. Therefore, it is necessary to conduct an
empirical study on the value relevance of CSP (i.e., quadruple measurement approach). It is also
important that quality of sustainability reporting is carried out under the shared value concept of
value relevance.

3 | METHODOLOGY

The value relevance of corporate sustainability was measured using two alternative research designs:
Panel regression research design8 and event study research design.9 The research studies that
employed the event study research design have a short-term perspective and consider investor
reactions around the event of publishing sustainabil-ity reports (Kaspereit & Lopatta, 2016).
However, this study aimed at a long-term value relevance approach to capture the impact of the
content of sustainability reports on capital market reactions. Hence, panel data methodology was
employed to investigate the value rele-vance of financial and nonfinancial information. Panel
regression methodology is based on two alternative models (i.e., fixed-effect model and random-
effect model) for the estimation of research models. To resolve issues regarding the choice of
methods, researchers employed Hausman tests because the choice between fixed-effect and
random-effect models is sample dependent. Thus, the preference of one model on other models
cannot be determined a priori (Onali, Ginesti, & Vasilakis, 2017). This study employed the fixed-effect
model because the Hausman test considers the data as time invariant (see Tables 3–7) for basic and
modified price regression models. The incremental value relevance of CSP (also for dimension of CSP)
and quality of sustainability reporting were analyzed using the Vuong test (1989). The Vuong test
(1989) employs the likelihood ratio to describe the statistical significance for direct comparisons of
com-peting models that explain the same dependent variables (see Dechow, 1994; Vuong, 1989).

3.1 | Econometric models

To investigate whether investors value corporate sustainability activi-ties and the quality of
sustainability reporting of the firms, we employed the market value model developed by Ohlson
(1995). This model postulates that market value of share is a function of book value and accounting
earnings only. We modified the Ohlson (1995) model by including two additional nonfinancial
variables, that is, qual-ity of sustainability reporting and CSP. The rationale behind this was that the
CSP reduces economic uncertainty and risk for investors while increasing the predictability of
earnings (Lourenço et al., 2012). These benefits are achieved by improving relationships and
reducing conflict costs with stakeholders (Roberts, 1992), creating sustainability reputation as a
competitive advantage (Bliese & Ployhart, 2002; Isabel et al., 2010) and increasing employee
productivity (Vitaliano, 2010). However, the quality of sustainability reporting adds credibility and
reliability to CSP, which enhances stakeholders' confidence in the information provided (Choi &
Wong, 2007; Chua, Vanstraelen, & Fong, 2009; Zorio, García-Benau, & Sierra, 2013), and investors
can accurately measure the market valuation of firms by reducing informa-tion asymmetry
(Schadewitz & Niskala, 2010). In this context, the fol-lowing equations present the proposed models:

Rumus

where i represents company, t is year, MV is market value per share, BVPS is book value of per share,
and EPS is earning per share. Sus is the sustainability performance of a company measured through
an equal-weighted score of four dimensions (i.e., economic, social, envi-ronmental, and corporate
governance). It is replaced by each dimen-sion performance score in the subsequent analysis to
capture the individual effect of each dimension. Qu is the quality of sustainability reporting with
values from 0 to 3 (i.e., self-declared as 0, audited by third party other than an accountant as 1,
audited by an accountant as 2, and audited by Big Four as 3). The quality of sustainability reporting
value ranged from 0 to 3, where a higher value indicated a higher quality of sustainability reporting.

3.2 | Data sources

We extracted the financial variables data (i.e., market value per share, book value per share, and
earnings per share) from the worldscope database. Sustainability data were taken from the ASSET4
database provided by Thomson Reuters. ASSET4 data are based on publicly available information
that authenticates the trustworthiness and reli-ability of a proxy of sustainability (Gong, Gao, Koh,
Sutcliffe, & Cullen, 2019; Ioannou & Serafeim, 2012; Semenova & Hassel, 2015). The database
measures sustainability through four dimensions: envi-ronmental, social, economic, and corporate
governance. ASSET4 uti-lizes z-scoring for normalization and generates comparable scores for each
dimension across firms. Each dimension score ranges from 0 to 100, where a higher score indicates a
higher performance of corpo-rate sustainability. The overall equally weighted score for sustainabil-ity
performance was calculated by the arithmetic mean of the sustainability dimensions' score
(Budsaratragoon & Jitmaneeroj, 2019). Furthermore, the quality of sustainability reporting data were
extracted from the GRI database.10

3.3 | Sample selection

This study used the panel data of 247 firms from 2012 to 2016 across 21 countries (see Table 1). This
time period was chosen because the GRI database started providing the name of the third-party
assurer post 2012 and to reduce the effect of the nonfinancial directive by the European Commission
since 2018. This study was designed to identify the impact of quality of sustainability reporting on
the value relevance of sustainability in both emerging and developed markets in a single model.
Although the characteristics of both markets are different, a homogenous group of countries was
created on the basis of the sustainability development index provided by the Global Green Economy
Index (GGEI).11 The initial sample was the best 30 green capital markets ranked by the GGEI.
However, the sample was reduced to 21 countries due to the nonavailability of data. Further-more,
we also winsorized the data at the 1st and 99th percentiles to remove the possible effect of the
outlier and potential data errors (Alali & Foote, 2012).

Tabel 1 & 2

4 | RESULTS

4.1 | Descriptive statistics

Table 2 provides the descriptive statistics (i.e., mean and standard deviation) and correlation matrix
of financial variables, sustainability variables score (social, economic, corporate governance,
environmen-tal, and overall equal-weighted score), and quality of sustainability reporting used in this
study. With respect to the descriptive statistics of the financial variable, the market value of share,
earnings per share, and book value per share had mean values of 346.88, 26.96, and 488.19,
respectively. The standard deviations for these variables were 696.17, 54.02, and 1,039, respectively.
On the other hand, with refer-ence to sustainability performance, the overall equal-weighted score
had a mean value of 61.45 with a standard deviation of 28.50. These results suggested that the mean
of the overall equal-weighted score of sustainability for the studied sample was in the third quartile
range of sustainability score. As sustainability scoring (i.e., overall and indi-vidual dimensions) ranges
from 0 to 100, where a higher score means a higher performance with respect to corporate
sustainability. For the studied sample, the mean values of economic, social, environmental, and
corporate governance dimensions were 61.35, 60.52, 61.82, and 53.13, respectively. Their standard
deviation values were 27.86, 29.46, 31.21, and 31.72, respectively. These results indicated that the
performance of the sustainability dimensions' score was above aver-age in the studied sample.
Moreover, the quality of sustainability reporting had a mean value of 0.88, with a standard deviation
of 1.28. This implied the moderately low quality of sustainability reporting in our sample, as firms
assured their sustainability reports from third-party firms other than accountant firms.

In view of the correlation matrix, all the predictor variables had correlation values below 0.50, except
the dimensions of sustainability performance. Therefore, separate regression models were used in
the analysis for each dimension of sustainability to avoid multicollinearity.

Tabel 3

4.2 | Empirical results

We employed the value relevance model proposed by Ohlson (1995), followed by modified models
with additional nonfinancial variables (i.e., corporate sustainability performance and quality of
sustainability reporting). Additionally, each dimension of corporate sustainability performance was
studied in a separate model by substituting the overall corporate sustainability proxy. Hence, five
different models with four submodels were constructed. Tables 3–7 show their results.
This study analyzed the coefficient of the price regression model to know how the reliability of
sustainability information is perceived by investors. We developed the required regression model in
steps. The first model included only financial predictor variables, followed by sustainability score
variables (economic score, corporate governance score, social score, and environmental score, equal-
weighted score), quality of sustainability reporting, and their interaction term. The regression
analysis revealed that the adjusted R2 for all five models and their submodels was above 64%. This
implied that the predictor variables explained about 64% of the variation in the predicted vari-able.
Furthermore, the F-statistics and Hausman test for all these models were highly significant at the 1%
level (see Tables 3–7).

Tabel 4 & 5

The regression coefficient of the overall equal-weighted score had a significant positive impact
(1.154, p < .05) on the market value of a firm (see Table 7). These results indicated that higher
sustainability performance would result in higher market value of firms, and investors have a positive
perception about sustainability performance. Similarly, with respect to dimensions of sustainability,
regression coefficient results revealed that economic (1.119, p value <.01), social (1.078, p value
<.05), and corporate gover-nance (1.133, p value <.01) dimensions have a significant positive
influence on the market value of the firm (see Tables 3, 4, and 6). However, the environmental
dimension had an insignificant (0.418, p value >.10) effect on the market value of the firm (see Table
5). These results revealed that a higher score on economic, social, and corporate governance
performance would result in higher market value for firms. However, the environmental performance
of firms had no relationship with the market value of firms. The results regarding overall
sustainability performance and dimension of sus-tainability performance (except environmental
dimension) were con-sistent with the value-enhancing theory in the context of the shared value
concept. This validated the viewpoint that if a firm chooses social activities that are mutually
beneficial for both the firm and society, then these activities would uplift the firm's value (Porter &
Kramer, 2006, 2011). Furthermore, empirically, these results aligned with the existing studies
conducted by Lins et al. (2017), Kaspereit and Lopatta (2016), Lopatta and Kaspereit (2014), and
Lourenço et al. (2012). They also found a positive impact of CSP on a firm's value. However, our
results were inconsistent with the conclusion proposed by Aras et al. (2018) and Cheung (2011). The
reason for this inconsistency might be that we employed cross-country analysis through a panel data
regression research design. Aras et al. (2018) conducted an analysis of a single sector in Turkey, while
Cheung (2011) focused on the short-term value relevance of corporate sustainability through an
event study research design. In the context of environmental dimension, this study's value
irrelevancy was against the viewpoint proposed by Hassel et al. (2005), Sinkin et al. (2008), and
Semenova et al. (2010). One of the possible reasons behind these contradictory results might be that
this study focused on environ-mental information provided in sustainability reports rather than
environmental disclosure.12 Hence, it would be difficult for inves-tors to identify the financial
materiality between environmental resource usage and business strategy and risk, especially under
dif-ferent regulatory regimes (The Association of Chartered Certified Accountants, 2013).

Tabel 6 & 7

The results of the study with reference to the regression coeffi-cient of quality of sustainability
reporting revealed the positive (β4M1=14.879, β4M2=15.031, β4M3 = 15.456, β4M4 = 15.215, and
β4M5 = 14.932) and significant (p-value <.05 in all five models) effect on market value of firms in all
five models regarding overall and dimensions of sustainability score (see Tables 3–7). These results
implied that firms with self-declared sustainability reports would show lower firm value. Conversely,
firms with sustainability reports assured by big four accountant firms would have higher firm value.
These results were consistent with the argument proposed by Martínez-Ferrero and García-Sánchez
(2017). They proposed that quality of sustainability reporting should be value relevant, as it reduces
the cost of capital, which translates into a firm's higher market value. However, all the interaction
terms (i.e., Qu × Ss, Qu × Ecos, Qu × Envs, and Qu × Eqs) between the quality of sustainability
reporting and CSP and its dimensions were insignificant except for the corporate governance
dimension (i.e., Qu × CGS), where Qu × CGS had negative (−0.763) and significant (p value <.01)
effect. These results implied that the quality of sustainability reporting had little or no influence on
the rela-tionship between CSP and market value of the firm. However, the quality of sustainability
reporting exhibited a substitution effect on corporate governance performance. In other words,
investors consid-ered third-party assurance as an alternative corporate governance mechanism, and
the corporate governance dimension could be rep-laced by third-party assurance. These results were
consistent with the viewpoint proposed in the literature that corporate governance has a weak link
with other dimensions of CSP (Sidhoum & Serra, 2018), and third-party assurance should be
considered as an alternative corpo-rate governance mechanism (Han, Kang, & Yoo, 2012).

This studyemployedtheVuongtest(1989)toverifythe incre-mental value relevance of CSP and the

quality of sustainability reporting. The explanatory power of the overall CSP and its dimen-sions
variables was compared against a base model containing only financial variables. Furthermore, with
respect to the quality of sus-tainability reporting, the explanatory power of models containing both
CSP (substituting with individual dimensions) and quality of sustainability variables was compared
against the base model hav-ing financial variables only/or with sustainability variables. The Vuong
test revealed that overall corporate sustainability (Vuong z-statistics = 6.84, p-value = .009),
corporate governance (Vuong z-statistics = 3.69, p-value = .0548), social (Vuong z-statistics = 5.35, p-
value = .021), and economic (Vuong z-statistics = 12.12, p-value = .000) models added value to the
explanatory power of financial variable models, making them more relevant to measure the market
value of firms. However, the comparison between the financial variables model and the
environmental model revealed a statistically insignificant value (Vuong z-statistics = 0.69, p-value = .
4055). With reference to quality of sustainability, results revealed that quality of sustainability
reporting in combination with overall CSP (Vuong z-statistics = 13.28, p-value = .001), social (Vuong z-
statistics = 12.03, p-value = .002), economic (Vuong z-sta-tistics = 12.12, p-value = .000), corporate
governance (Vuong z-sta-tistics = 10.19, p-value = .006), or environmental dimension (Vuong z-
statistics = 7.56, p-value = .022) was statistically more relevant in explaining the change in market
value of the firm as compared to models having financial variables only/or with sustainability vari-

ables. These results indicated that overall ΔR2 was low, but sustain-ability performance (excluding
environmental dimension) and quality of sustainability reporting added significant value to the
explanatory power of models. Hence, these results provided robustness to regression coefficient
analysis, which states that the quality of sustainability reporting and overall corporate sustainabil-ity,
social dimension, corporate governance dimension, and eco-nomic dimension have an incremental
value relevance effect, whereas the environmental dimension of CSP does not have incre-mental
value relevance.

5 | CONCLUSION

The global pursuit of sustainable development changed the role of corporations. The traditional view
of firms (i.e., the shareholders view) which suggests that firms are only responsible for creating value
for shareholders has changed. Now firms focus on creating sustainable value which covers the four
dimensions of sustainability, that is, envi-ronmental, social, corporate governance, and economic.
CSP shows how firms' activities influence the environment, society, and economy, as well as the
firm's commitment to the achievement of objectives of sustainable development. However, the
quality of sustainability reporting authenticates the reliability of information on CSP. In this sense,
both the quality of sustainability reporting and sustainability performance are valued by investors.
Consequently, this study aimed at creating a business case for the value relevance of sustainability
performance and quality of sustainability.

The results of the regression analysis of value relevance rev-ealed that investors valued the overall
CSP (achieved through eco-nomic, social, and corporate governance dimensions) and quality of
sustainability reporting. Nonetheless, environmental performance was perceived as irrelevant by
investors for enhancing firm valua-tion. The quality of sustainability reporting played an instrumental
role in the value relevance of corporate governance because it was perceived as an alternative
corporate governance mechanism by investors. Hence, it can be concluded that CSP is value relevant
and validates the social impact hypothesis. However, its dimensions are not equal. The corporate
governance dimension should be con-sidered from a different perspective than the other three
dimen-sions because these three dimensions focus on basic operational business strategies, whereas
corporate governance is concerned with managing and reporting these business strategies.13 In this
context, the quality of sustainability reporting has a substituting effect on the corporate governance
dimension. The quality of sus-tainability reporting is also concerned with the reliability of reported
information through third-party assurance. Furthermore, the information provided in sustainability
reports regarding envi-ronmental dimensions should be standardized across firms and have financial
materiality for equity investors.

This study's findings are useful for future research on the corpo-rate sustainability of firms as well as
for practitioners, such as share-holders, regulators, standard setters, and other stakeholders
interested in the sustainability performance of firms. Simultaneously, it would help management of
firms to understand the role of third-party insurance in the corporate sustainability context, so that a
firm would be valued by investors while making investment decisions.

The current understanding of value relevance can be enhanced by focusing on institutional factors,
such as exploring whether the basis of regulation of corporate sustainability reporting
(Voluntary/Mandatory) would affect the value relevance of CSP.