The mediating role of financial reporting quality in the relationship between ESG performance and firm value: evidence from SRI-KEHATI indexed firms

Abstract

This study examines the relationship between Environmental, Social, and Governance (ESG) performance and firm value. It focuses on the mediating role of financial reporting quality among firms listed on Indonesia’s SRI-KEHATI Index. Using data from 117 firm-year observations between 2018 and 2023, the study employs multiple regression and mediation analyses with Hayes’ PROCESS Macro to evaluate direct and indirect effects. The results show that ESG performance significantly positively affects on firm value, indicating that companies that integrate sustainability practices into their strategies are valued more favorably by the market. However, the mediating effect of financial reporting quality is not statistically significant. This suggests that ESG primarily influences firm value through direct mechanisms, such as enhanced corporate reputation, stakeholder trust, and strategic positioning, rather than through improvements in financial reporting quality. These findings underscore the strategic importance of ESG integration as a driver of long-term value creation and investor confidence. Managers should view ESG as a strategic investment, emphasizing transparency, sustainability reporting, and stakeholder engagement. Future research should incorporate broader samples, objective ESG metrics, and emerging sustainability reporting frameworks to enhance generalizability and comparability.