The Effect of Sustainability Strategies on Firm Value: The Roles of Financial Development and Environmental Performance

ABSTRACT This study investigates the effect of sustainability strategy on firm value, with financial development and environmental performance as moderating and mediating factors. Sustainability issues have been incorporated into management strategies. However, studies investigating their impact on firm value across different financial development contexts, an essential external environment factor, are lacking. Employing industry and year fixed effects, firm‐clustered standard errors, and a moderated‐mediation SEM analysis on 76,459 firm‐year observations across 50 countries from 2002 to 2023, we find that sustainability strategies, reflected in improved environmental performance, enhance firm value. However, financial development weakens the added value of sustainability strategies on both environmental performance and firm value. This relationship is highly dependent on institutional and sectoral contexts. To the best of our knowledge, this is the first large‐scale study to employ a global, longitudinal dataset to examine how financial development moderates the impact of sustainability strategies on firm value, via environmental performance, across countries and sectors. This study provides empirical evidence on the importance of sustainability as a strategic issue affecting firm value. Further, this study provides insights for investors and regulators into the moderating effect of financial development on the effectiveness of sustainability strategies. Finally, we show that firms' ability to translate sustainability initiatives into value depends on industry characteristics.