Addressing endogeneity by proposing novel instrumental variables in the nexus of sustainability reporting and firm financial performance: A step‐by‐step procedure for non‐experts

Most of the prior literature that investigated the nexus between corporate sustainability disclosures (CSD) and firm financial performance (FFP) has largely been ignored the potential problem of endogeneity. The omitted variable(s), measurement error, and reverse causality, which are the known cause...

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Bibliographic Details
Published inBusiness strategy and the environment Vol. 29; no. 8; pp. 3086 - 3103
Main Authors Zahid, Muhammad, Rahman, Haseeb Ur, Khan, Musa, Ali, Wajahat, Shad, Fazaila
Format Journal Article
LanguageEnglish
Published Chichester Wiley Periodicals Inc 01.12.2020
Subjects
Annual reports
Banking
Bias
Causality
Content analysis
corporate sustainability disclosures
endogeneity
Error analysis
Financial performance
firm financial performance (FFP)
instrumental variables
integrated strategies
Least squares
Management reports
Measurement
Measurement errors
Regulatory agencies
Social sustainability
Statistical analysis
Statistics
Sustainability
Sustainability reporting
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Summary:Most of the prior literature that investigated the nexus between corporate sustainability disclosures (CSD) and firm financial performance (FFP) has largely been ignored the potential problem of endogeneity. The omitted variable(s), measurement error, and reverse causality, which are the known causes of endogeneity, may also be the possible reasons for the indecisive and inconsistent relationship between CSD and FFP. Accordingly, this study reinvestigates the relationship by addressing the problem of endogeneity through applying the two‐stage least squares (2SLS) estimator to data collected from the annual reports of the top 10 Pakistani banks through content analysis from 2013 to 2017. The results show a positive impact of the CSD and social sustainability on FFP. However, environmental sustainability exerted a negative impact on FFP. The statistics for 2SLS are much different than those of the ordinary least squares (OLS), which explain the importance of addressing the endogeneity bias. The study offers a methodological procedure that identifies and addresses the endogeneity through a step‐by‐step process in Stata 13.0. Besides, the study also has a novelty to propose and validate additional instrumental variables for the research in the future. Overall, the study has many contributions and implications for different stakeholders such as academia, regulatory bodies, and practitioners in the field of corporate sustainability.
ISSN:0964-4733
1099-0836
DOI:10.1002/bse.2559