Assessing financial inclusion strategy from behavioural finance lens: evidence from the Egyptian stock market

Abstract

The main aim of this paper is to investigate the impact of Environmental, Social and Governance (ESG) rating on firm value through the three valuation channels of dividends, free cash flow to firm and cost of equity in the context of Egyptian firms listed on S&P/EGX ESG index. The study conducts static and dynamic regression analyses for the three firm value determinants models to test for the hypothesised relationships in all the examined firms from 2010 till 2022. Empirical results from the statistical analyses highlight that there is a significant positive relationship between ESG rating and dividend payout. In addition, ESG rating has a significant negative impact on free cash flow to firm and cost of equity. Findings offer valuable guidance to practitioners and regulatory bodies in emerging economies, particularly in Egypt, by providing empirical evidence on the potential advantages of firm alignment to ESG practices with increased firm value. Such insights can pave the way for enhanced ESG adoption and sustainability practices, ultimately contributing to the overall improvement of businesses and the environment. The study is the first in the context of Egypt and the Middle East and North Africa region to test for the impact of ESG on the collective three valuation channels of dividends, free cash flow to firm and cost of equity, while providing a comparative analysis between the three firm value determinants in the same context.