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korean management review - Vol. 53 , No. 1

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[ Article ]
korean management review - Vol. 53, No. 1, pp. 197-224
Abbreviation: kmr
ISSN: 1226-1874 (Print)
Print publication date 28 Feb 2024
Received 04 Oct 2023 Revised 02 Jan 2024 Accepted 18 Jan 2024
DOI: https://doi.org/10.17287/kmr.2024.53.1.197
ESG Activities and Value Relevance: Break Down the Market-to-Book Ratio into Growth Opportunities and Misvaluation Measures
Hyunseok Kim
(First Author) National Pension Research Institute (khs8319@naver.com)
기업의 ESG 활동과 가치관련성 분석: 가치평가 변수를 성장기회와 가치평가오류로 분해하여

Copyright 2024 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

The Market-to-Book (M/B) ratio identifies not only growth opportunities but also whether a stock is overvalued or undervalued. This study dissects the M/B ratio into growth opportunities (long-run value to book; LVTB) and misvaluation (firm-specific error; FSE and time-series sector error; TSE) and then analyzes how these factors manifest based on ESG characteristics. The empirical findings reveal that ESG ratings have a positive impact on both valuation errors (FSE and TSE) and long-term growth opportunities (LVTB). In terms of economic impact, when ESG ratings increase (or decrease) by one grade, the firm-specific error increases (or decreases) by 5.1%, the time-series sector error increases (or decreases) by 0.9%, and long-term growth opportunities increase (or decrease) by 0.8%. This suggests that ESG ratings are more closely related to a valuation error based on firm-specific characteristics rather than long-term growth factors.


Keywords: ESG, Firm Value, Misvaluation, Growth Opportunity, Sustainability

Acknowledgments

This paper is a revised version of the National Pension Research Institute Research Report (2022-19) titled ‘A Study on Corporate ESG Characteristics and Valuation’ in the form of an academic paper. Additionally, the content of this research reflects the author's personal opinions and is not an official stance of the National Pension Research Institute.

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∙ The author Hyunseok Kim is a deputy research fellow in the investment policy division at the National Pension Research Institute. He earned his Ph.D. in Finance from Sungkyunkwan University. His research interests include capital structure, payout policy, valuation, pension fund asset management.