Investment, Internal Finance and ESG Practices: Does Firm Size Matter?

This study seeks to explore how ESG practices moderate the dependency of investment on a firm’s internal financing i.e. cash flow, popularly termed as investment-cash flow sensitivity. Applying panel OLS (Ordinary Least Squares) regression on a dataset comprising 222 firms categorized into big and small, spanning from 2012 to 2022, the results reveal that small firms exhibit higher investment-cash flow sensitivity than their larger counterparts. This suggests that small firms encounter greater financial constraints and market friction when seeking external funding. Moreover, integrating ESG practices into operations leads to a reduction in investment-cash flow sensitivity for both large and small firms. Notably, the moderating effect of ESG is more pronounced in small firms than in large ones.