Conference Universitas Siliwangi
International Seminar and Conference on Management, Research, and Transformation (I-SMART)

The Effect of ESG Performance on Investment Efficiency Mediated by Financing Constrains: Evidence from Indonesia

Date Published : 20 October 2026

Contributors

Rela

University of Siliwangi
Corresponding Author

Keywords

ESG Performance Investment Efficiency Financing Constraints

Proceeding

Vol. 1 (2025): International Seminar and Conference on Management, Research, and Transformation (I-SMART 1.0)

Track

General Track

License

Copyright (c) 2026 International Seminar and Conference on Management, Research, and Transformation (I-SMART)

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

This study examines whether and how environmental, social, and governance (ESG) performance improves firms’ investment efficiency through the channel of financing constraints. Addressing a key gap most prior evidence comes from developed markets, we focus on Indonesia’s institutional setting where capital market frictions and disclosure practices differ meaningfully. The sample comprises non-financial firms listed on the Indonesia Stock Exchange (IDX) on 2024, selected using purposive sampling based on criteria such as data availability and sector representation. We estimate panel regressions with firm and year fixed effects to test both the direct association between ESG performance and investment efficiency and the indirect pathway operating through financing constraints. The results indicate that higher ESG performance is associated with greater investment efficiency and that lower financing constraints partially mediate this relationship. In other words, stronger ESG performance appears to ease capital frictions, which helps firms allocate resources closer to their optimal level. These findings extend the ESG real effects literature to an emerging market context and suggest practical implications for managers where investments in credible ESG practices can reduce financing hurdles and enhance capital allocation quality in Indonesia’s market environment.

References

Albuquerque, R., & Zhang, C. (2018). Corporate Social Responsibility and Firm Risk : Theory and Empirical Evidence. Management Science, 1909, 1–19.
Almeida, H., Campello, M., Faulkender, M., Frank, M., Hackbarth, D., Kahle, K., Ikenberry, D., Mcdonald, B., Weisbach, M., Yang, J., & Wurgler, J. (2022). Financing Frictions and the Substitution Between Internal and External Funds*. Journal of Finance. http://ssrn.com/abstract=970996Electroniccopyavailableat:https://ssrn.com/abstract=970996Electroniccopyavailableat:http://ssrn.com/abstract=970996
Biddle, G. C., Hilary, G., & Verdi, R. S. (2012). How Does Financial Reporting Quality Relate to Investment Efficiency? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1146536
Cahyono, S., Damayanti, V. A., Ardianto, A., & Ardianto, A. (2024). Empirical Evidence of ESG Disclosure’s Impact on Corporate Investment Decision in Indonesia. Jurnal Dinamika Akuntansi Dan Bisnis, 11(1), 135–154. https://doi.org/10.24815/jdab.v11i1.31466
Chen, L., Liu, C., & Wang, G. (2013). Financial constraints, investment efficiency and corporate governance: Empirical evidence from China. 2013 10th International Conference on Service Systems and Service Management - Proceedings of ICSSSM 2013, 1988, 445–449. https://doi.org/10.1109/ICSSSM.2013.6602546
El Ghoul, S., Guedhami, O., Kwok, C. C. Y., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance, 35(9), 2388–2406. https://doi.org/10.1016/j.jbankfin.2011.02.007
Fazzari, S., Hubbard, R., Petersen, B., Blinder, A., & Poterba, J. (1988). Financing Corporate Constraints Investment. Brookings Institution Press, 1988(1), 141–206. http://www.jstor.org/stable/2534426 .
Hadlock, C. J., & Pierce, J. R. (2010). New evidence on measuring financial constraints: Moving beyond the KZ index. Review of Financial Studies, 23(5), 1909–1940. https://doi.org/10.1093/rfs/hhq009
Hart, S. L., & Hart, S. L. (2013). A NATURAL-RESOURCE-BASED VIEW OF THE FIRM. 20(4), 986–1014.
Ioannou, I., & Serafeim, G. (2021). The Consequences of Mandatory Corporate Sustainability Reporting. Harvard Business School Working Paper, 11–100. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799589
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, 112(1), 169–213. https://doi.org/10.1162/003355397555163
Khan, M., Dor, A. Ben, Gubler, J., Hartford, H., Hoepner, A., Jayaraman, A., Ketterer, S., Kuhnert, D., Myers, R., & Taylor, D. (2019). Corporate Governance, ESG, and Stock Returns around the World. In Financial Analysts Journal (Vol. 75, Issue 4).
Khan, M. K., Ammar Zahid, R. M., Saleem, A., & Sági, J. (2021). Board composition and social & environmental accountability: A dynamic model analysis of chinese firms. Sustainability (Switzerland), 13(19). https://doi.org/10.3390/su131910662
Lamont, O., Polk, C., & Saá-Requejo, J. (2001). The Society for Financial Studies Financial Constraints and Stock Returns. Source: The Review of Financial Studies, 14(2), 529–554.
Nareswari, N., Tarczynska-Luniewska, M., & Al Hashfi, R. U. (2023). Analysis of Environmental, Social, and Governance Performance in Indonesia: Role of ESG on Corporate Performance. Procedia Computer Science, 225, 1748–1756. https://doi.org/10.1016/j.procs.2023.10.164
Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11(2–3), 159–189. https://doi.org/10.1007/s11142-006-9012-1

Downloads

How to Cite

The Effect of ESG Performance on Investment Efficiency Mediated by Financing Constrains: Evidence from Indonesia (R. A.- zahra Salsabila, Trans.). (2026). International Seminar and Conference on Management, Research, and Transformation (I-SMART), 1, 911-917. https://conference.unsil.ac.id/ismart/paper/view/149